Which option do you prefer?
- I flip a coin. Heads, you get $100,000. Tails, you get nothing.
- I give you $10,000.
Of course, like any sane person, you’d take the $10,000. But maybe that isn’t so sane at all. In economics, there is this idea of expected value. You multiply the probability of an event by the potential payoff and get how much return you can statistically expect.
In this example, option one has an expected value of $50,000. Option two has an expected value of $10,000. The $40,000 difference is called risk premium. If you’re willing to take on risk, you stand to gain a much larger reward.
The reason most people aren’t is that they spend their entire lives chasing certainty. No matter how big the reward is, their desperate need for security has determined every outcome before they’re even presented with a choice.
In a 1951 book called The Wisdom of Insecurity, Alan Watts talks about the benefits of not craving certainty so much:
“I call it the ‘backwards law.’ When you try to stay on the surface of the water, you sink; but when you try to sink, you float. When you hold your breath, you lose it — which immediately calls to mind an ancient and much neglected saying, ‘Whosoever would save his soul shall…
