Pascal's Wager & You
The Most Important Mental Model You Never Heard Of
What to do? What to do?
People spend a lot of time overanalyzing and daydreaming about decisions. I know. The more introverted you are and the more you have internal monologues, the more likely you are to agonize over decisions.
It can be a huge mental trap as you debate about everything.
Do you get the $40 or $80 pants? The difference in look and material isn’t huge, so do you really want to pay twice as much for a marginal difference.
Do you set a sell order at $11.50 or $11.75 on that stock? That is 15% vs 17.5% return and $100s…(The answer is $11.69 anyway)
Do you work a few hours extra on a work project or wrap it up or is it good enough? This may be enough to get you over the bubble and get a few $1k bigger bonus.
Should you put your $500 contribution into SPY or just get a 4.5% CD?
You can probably think of dozens of day-to-day financial decisions you make that you waffle on as you weigh the pros vs cons. We all do it. And it causes decision fatigue which tires you out. And if you are blowing your decision load over $20 decisions, you are eating up mental processing power for the decisions that actually move the needle.
This is extra true if you are naturally indecisive or do lots of self-talk. And it is easy to spiral into minutia.
It is helpful to be reminded to zoom out. In the span of your entire 80+ years of life, is an extra $40 here or $100 here going to move the needle? Sure, you can’t always make the most expensive decision, but does every single choice warrant that level of thought?
No. No it doesn’t.
For most people, there are only a handful of choices in their lives that make up the majority of your success or lack thereof. Building a successful business. Making a jump to a new job. Buying a house at the right time. A few stocks that really took off and make the majority of your portfolio gains. And if you shot your load on minutia, you are likely not going to have the energy to focus on the big ones.
[Anecdotes:
Steve Jobs
He did 2 things in his life. The first, was force through an iTunes update that wiped out 1,000s of questionably downloaded songs on F’ers college computer. This resulted in having infinite viruses and malware on the laptop but no music - including the unreleased early albums of some classic artists - and made F’er swear off any apple product forever.
The 2nd was start the trend of tech guys wearing the same outfit 7 days a week to limit decisions. (Editor note - he may have done something with phones or something). Whether true or not, the theme here was that by viciously cutting the non important decisions - like what to wear - you save mental capacity for big ones - like should you nuke my music collection.
Stock Returns:
Most of the market returns historically, and portfolio returns in portfolios, are driven by a few high-flying stocks. A lot of the portfolio decisions people make are fiddling around teh edges while a few names account for most of their performance. For example:
To buy a coffee or not to buy a coffee:
For a while the cool finance guys said to skip a coffee because that $2 a day invested would be [insert comically large and incorrect number here]. Now the tide has turned to people saying “buy the coffee". This is the tradeoff of froogalness vs decision fatigue.]
The 80/20 rule is a generalized observation that for many things, 20% of the group makes up 80% of the results. It is a useful heuristic. But in life, it tends to be even more skewed since there are so many decisions you make. 90/10 or even 99/1 is more like it, where 1% of your choices lead to 99% of your results.
This is why focusing on asymmetric outcomes are so valuable.
If you can take a few wins that have huge upsides, and avoid the few losses with huge downsides, you come out way ahead.
And one of the best ways to remember this is the framework developed by Blaise Pascal (I assume it isn’t pronounced as “blaze”, but that is how I say it when reading it)
