There is a difference between correct decisions and right decisions. In the long run, it's much more important to be correct than right.
The correct and incorrect distinction is based on the Expected Value (EV) of the decision. Right and wrong is based on whether a decision works out in a particular instance.
I discovered this idea from "What I Learned Losing A Million Dollars" by Jim Paul and Brendan Moynihan. For example, say you're playing poker. You have the option of paying $100, with a 20 percent chance of winning $1,000. The expected value is $200 ($1,000 x 20 percent).
The correct decision is to make the bet. You pay $100 for an expected value of $200, which is a positive expected value. If you knew you were going to face that bet 100 times and you made it every time, you would come pretty close to doubling your money.
If you win in that instance, then it's right. If you lose, then it's wrong. I use poker as an analogy because it's a more clearcut way to explain the implications, but all of the principles apply to any domain of your life, be it business or personal.
1. There's a difference between the quantitative versus the qualitative value of outcomes.
The player in this poker game who is making the correct decision is going to be wrong the majority of the time. By quantity, 80 percent of his decisions are wrong. However, if he is making correct decisions, he will double his money.
The poker player may lose $100 on nine hands out of 10 (making his winning percentage 10 percent). But he may win $1,800 on a single hand (making his net winnings $900). Even though he loses nine times out of 10, he still doubles his money.
Warren Buffett's investments firm, Berkshire Hathaway, has assets totaling around $552 billion. But the vast majority of that came from a small number investments: Disney, The Washington Post and Geico. It's less important how often you are right, and more important how big the payoffs are.
2. Successful people are wrong most of the time.
They're just wrong on positive Expected Value decisions. Paying $100 with a 20 percent chance of winning $1,000 means you lose 80 percent of the hands you play, but you still double your money over time.
This is often obscured because when you read someone's two-paragraph bio, you only hear about the three successful projects or businesses he or she has taken part in. Often, this is only .1 percent of all the projects the person has done.
What is it that most successful people realize that others don't?
3. You are biologically wired to focus on being right, rather than being correct.
If you're wandering around the African savannah, there aren't any events with non-linear outcomes. If you kill a gazelle, you get one gazelle worth of meat. If you bet $100 in a poker game, you could win $1,000.
The size of the output does not correlate linearly with the input. The equivalent for someone on the savannah would be having one gazelle per herd, which is the jackpot that magically produces 10 gazelle worth of meat when you kill it.
Poker seems to be the best analogy to use because it's widely perceived as “risky” or a “game of chance.” If you don't understand the game and only play a few hands, poker does largely seem to be a game of chance. There's no room for the law of large numbers or skill to take effect. The people I know who are skilled at the game can predict their incomes with remarkable accuracy.
4. Being wrong can be really profitable.
An excerpt from Michael Lewis's "Liar's Poker" -- a book recounting his experience as a trader on Wall Street -- illustrates this point. He explains the trading strategy of a co-worker who made money simply by preying off another investor's fear of being wrong, even if it was correct.
First, when all investors were doing the same thing, he would actively seek to do the opposite. The word stockbrokers use for this approach is 'contrarian.' Everyone wants to be one. But no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others. But when a market is widely regarded to be in a bad way, even if the problems are illusory, many investors get out. A good example of this was the crisis at the US Farm Credit Corporation. It looked for a moment as if Farm Credit might go bankrupt. Investors stampeded out of Farm Credit bonds because after having been warned of the possibility of an accident, they couldn't be seen in the vicinity without endangering their reputations. In an age where failure isn't allowed -- where the US government had rescued firms as remote from the national interest as Chrysler and the Continental Illinois Bank -- there was no chance the government would allow the Farm Credit bank to default. The thought of not bailing out an $80 billion institution that had lent money to America's distressed farmers was absurd. Institutional investors knew this. That is the point. The people selling Farm Credit bonds for less than they were worth weren't necessarily stupid. They simply could not be seen holding them.
Because investors have to raise money -- and because most people don't understand risk -- they have to worry about being wrong, instead of worrying about being correct. A similar example I've heard from venture capitalists is that companies that are attractive investments must have both huge potential and also seem like terrible ideas. Longer lasting batteries have huge potential right now, but everyone knows that. Therefore, there isn't a lot of margin left.
Facebook, on the other hand, sounded like a terrible idea when it started. People did not think a website for broke college students would make money. The same went for Airbnb. Critics asked, "Who would use a site to help strangers sleep in your house?"
There's a spectrum here as well. It doesn't just include billion-dollar companies. Lots of highly profitable, smaller companies have relatively larger potential and worse-sounding ideas than others. If no one thinks your idea is stupid, there's probably not a lot of margin left in it. If literally everyone thinks your idea is stupid, it is.
Always cap your downside to make sure your exposure is non-fatal. A poker player going all-in on a positive EV decision, where the odds of winning are only 10 percent, is risky if it means he will run out of money.
This seems to lead to a simple two-question process to evaluate opportunities. Will this kill me (literally or metaphorically)? If not, what's the correct (positive expected value) decision? Since I've discovered this framework, I've found it to be broadly applicable.
Here are three examples of risky situations to get you started:
1. Dating And Making Friends
If you go on 200 dates in a lifetime, the typical results might be that 100 are terrible, 50 are bad, 30 are meh, 19 are good and one is great. So, you've got a 0.5 percent chance of being right.
But it's still a correct decision to go on a bunch of dates because the payoff from one right date is worth the 99.5 percent of the time you're wrong. The same math is true with meeting people and the chances of them becoming your close friends.
2. Meetups And Conferences
Most Meetups and conferences are terrible. But the few good ones are so good, you end up being glad you went. Even though most new conferences you go to will be terrible, it's worth it to go to a bunch to figure out which ones are best.
In the last five years, I've dabbled in law, academia, medical interpreting, teaching English, SEO, project management, copywriting, B2B software sales, health care consulting, marketing consulting, operations and writing books. Even if I'm being generous with myself, my batting average is poor. However, my "slugging percentage" is good enough.
Most of these career paths haven't succeeded, but the ones that have seemed to have worked out well enough to make up for all the failures. Are you focused on being correct or being right? There's more margin (over the long run) in being correct.