On the Edge

nate silver, on the edge, the art of risking everything in a world of global pandemics and market crashes, how should we think about risk?

how do we manage it?

can we avoid it?

and should we ever embrace it?

the author nate silver has a background as both a professional poker player and political forecaster.

in this chapter, we'll see how these combine to give a unique perspective on risk and uncertainty.

we'll learn why some forecasters consistently outperform others, and how highly successful risk-takers choose to approach decisions.

whether you make policy, make investments, or just want to make sense of the news, this chapter will help you learn the skill of grappling with uncertainty.

so if you're ready, it's time to ante up.

expected value explained sometimes the wisest bet is one you're probably going to lose.

don't believe me?

then it's time to talk about expected value.

imagine a raffle where tickets cost $100 each, and there's a single grand prize of $1,000,000.

if 2,000 tickets are sold, your chances of winning are naturally slim.

one in 2,000.

many people shy away from such long odds.

after all, it's quite likely you'll be kissing that money goodbye.

but let's break it down.

expected value is the average outcome of a probabilistic event over the long run.

it takes into account the possible outcomes, their probabilities, and the respective gains or losses associated with them.

in this raffle scenario, there are only two options per ticket.

if you lose, you've spent $100 and you're down by that amount.

but if you win, you're up by $999,900.

if you combine the probability of each outcome with their payoffs, we get an expected value per ticket of $400.

despite the high likelihood of losing, the potential reward is so great, it easily outweighs the cost of the ticket.

does that mean you should always buy it?

not necessarily.

if it's your last $100 and without it you'll starve, then definitely not.

but if you can tolerate the risk, bets with positive expected value are exactly the ones that are likely to get you wins in the long run.

before becoming a renowned political forecaster, silver honed his skills as a professional poker player.

in so doing, he developed a deep appreciation for risk and probability.

this appreciation is a necessity in the poker world, but it sets him apart from many people in politics.

there are, you might say, two kinds of people in this world.

those who understand probability and those who don't.

consider silver's experience during the 2016 u.s. presidential election between hillary clinton and donald trump.

in his work as a forecaster, silver had carefully crafted a statistical model, one which gave trump a 29% chance of winning the presidency.

when trump emerged victorious, many critics lambasted silver, calling him an idiot for getting it wrong.

however, this reaction betrays a fundamental misunderstanding of probability.

a 29% chance is far from a certainty of failure.

if you roll a six-sided die, you have about a 33% chance of rolling a one or a two.

no one would be shocked if that happened.

similarly, trump's victory shouldn't have been seen as a refutation of silver's model, but rather as an outcome well within its range of possibilities.

moreover, silver's model had forecasted trump's odds as higher than most other models did.

some of these put trump as low as 1%, while the betting markets put him at 17%.

by giving trump a higher chance than most other forecasters, silver's forecast proved more accurate.

remember the concept of expected value?

if you'd have bet on the election at the odds implied by silver's forecast compared to the betting market rate at the time, you'd have made a tidy profit.

in fact, people did.

silver describes how, repeatedly, poker players have offered to pick up his dinner tab, grateful for the money they made with the help of his model.

this anecdote perfectly encapsulates the divide between those who understand probability and those who don't.

whether at the poker table, in the boardroom, or in political office, the ability to think in terms of risk and probability can give you an edge over those who rely on simplistic, black-and-white thinking.

the river vs. the village nate silver's journey from professional poker player to renowned political forecaster also provides him with a unique vantage point on two distinct approaches to understanding risk and uncertainty.

through his experiences, silver has identified what he calls the river, a conceptual landscape populated by individuals who excel at calculated risk-taking and analytical thinking.

the inhabitants of the river share several cognitive traits that set them apart.

they possess a strong analytical mindset, adept at breaking down complex issues into manageable parts.

their capacity for abstract reasoning allows them to extrapolate general principles from specific observations and construct mental models to navigate unfamiliar territories.

perhaps most distinctively, river dwellers practice decoupling, the ability to examine ideas independently from their context, often leading to insights others might overlook.

the river is populated by calculated risk-takers and analytical thinkers, analysts, forecasters, rationalists, and, yes, poker players.

in contrast to the river, silver identifies another conceptual community he terms the village.

this group encompasses many government workers, media professionals, and academics.

while often highly educated and accomplished, villagers typically approach risk and uncertainty differently than their river counterparts.

they struggle with certain river concepts, for example, treating unlikely events as impossible and likely events as certain.

river dwellers, for their part, can sometimes miss nuances in human behavior and social dynamics.

silver's background in both professional poker and political forecasting has positioned him as an intermediary between these two communities.

he seeks to bridge the divide, arguing that a balanced approach incorporating both perspectives can help us better navigate our complex world.

core habits for managing risk whether they be hedge fund managers, generals, or astronauts, successful risk-takers share some common habits that set them apart.

let's take this section to look at three in particular.

strategic empathy, process orientation, and a raise or fold mentality.

strategic empathy involves putting yourself in your opponent's or competitor's shoes to gain a strategic advantage.

it's not about sympathy, but rather about understanding motivations and anticipating actions.

mark cuban, entrepreneur and shark tank investor, exemplifies this approach when evaluating business pitches.

he mentally places himself in the entrepreneur's position, asking himself what challenges he would face if it were his company.

cuban even applies this strategy to his own businesses, routinely asking, how would i kick my own ass?

to anticipate competitive threats.

in military contexts, strategic empathy can be crucial.

former u.s. national security advisor h.r. mcmaster criticizes strategies that fail to consider the enemy's perspective.

he points to iraq, where policymakers ignored growing insurgent threats because they didn't adequately consider the situation from the iraqi perspective.

mcmaster argues that effective military planning requires understanding how the conflict looks to the enemy on the ground as well.

another hallmark of successful risk-takers is an orientation towards process.

this mindset focuses on consistent execution and long-term improvement, rather than fixating on short-term results.

daniel galfond, a professional poker player, demonstrates this approach.

in one high-stakes match, galfond found himself down 900,000 euros.

it was harrowing, but his process led him to believe he had an edge.

instead of abandoning his strategy or letting emotions dictate his play, galfond methodically reviewed his performance, studied simulations, and ultimately clawed back to win by a slim margin.

contrast this with a results-oriented mindset, where individuals might drastically alter their strategy based on short-term outcomes.

in poker, this could manifest as a player making increasingly risky bets to recoup losses, ignoring their overall strategy.

in business, it might involve a company abruptly changing its long-term plans due to a single quarter's poor performance, potentially sacrificing future growth.

the third habit is to adopt a raise-or-fold mentality.

this approach advocates for either full commitment to a course of action or complete disengagement, avoiding middle-ground compromises that often prove ineffective.

it emphasizes taking decisive action over half-measures and hedging, as indecision can sometimes be worse than a clear commitment in either direction.

the covid-19 pandemic provides a striking example of this principle in action.

silver argues that countries which adopted clear, decisive strategies generally fared better than those attempting middle-ground compromises.

the former decisive examples included new zealand's approach of aggressive containment – raising – and sweden's approach of minimal intervention – folding.

both, he argues, ultimately fared better than compromise approaches, which often resulted in prolonged disruption without effectively controlling the virus.

let's finish by looking at two more habits common to highly successful risk-takers – conscientious contrarianism and selective attention.

conscientious contrarianism is about developing well-reasoned theories for why the majority might be wrong.

for example, through misaligned incentives in a system.

take katalin karikó's groundbreaking work on mrna vaccines.

the conventional wisdom in academia had been that mrna was too unstable to be used therapeutically.

most researchers and funders, therefore, focused on incremental improvements to existing vaccine technologies.

karikó, however, understood something.

academia has a preference for quick, publishable results and an aversion to long-term, high-risk projects.

this, she believed, was causing people to overlook a promising avenue.

by persisting with her research despite institutional skepticism, karikó built the foundation for what would eventually enable the rapid creation of covid-19 vaccines, saving countless lives worldwide.

selective attention is the ability to focus intensely on critical information while filtering out distractions.

this ability is highlighted by astronaut catherine sullivan.

during critical phases of a space mission, like launch or re-entry, astronauts must quickly assess which of the myriad inputs and alerts require immediate attention and which can be safely ignored.

as sullivan's favorite mantra goes, the main thing is to keep the main thing the main thing.

managing risk is about focusing on what truly matters in a given moment and directing all available mental resources to that task.

importantly, selective attention also involves knowing when to conserve mental energy.

in poker, for instance, top players often appear disengaged between hands, perhaps scrolling on their phones, but they snap to attention when important situations arise.

this measured approach to attention allows them to maintain peak performance over long, grueling sessions.

individual entrepreneurs and executives often practice a similar form of selective attention, knowing when to dive deep into the details of a project and when to step back and conserve their mental resources for more critical decisions.

modulating focus allows them to avoid burnout while still being fully present for pivotal moments.

selective attention allows risk-takers to maintain maximum focus on what matters most, while conscientious contrarianism enables them to identify unique opportunities that others overlook.

the main takeaway of this chapter to on the edge by nate silver is that understanding and managing risk is crucial in any industry.

silver distinguishes two approaches to uncertainty, the analytical risk-calculating mindset of river thinkers and the more contextual, less numerically savvy perspective of village thinkers.

through the course of this chapter, we explored several key concepts and strategies for navigating uncertainty.

these include calculating expected value, practicing strategic empathy, and focusing on process.

we also covered the importance of conscientious contrarianism, challenging mainstream views based on well-reasoned arguments, and selective attention to critical information.

so whether you're navigating the complexities of politics, business, or even games of chance, becoming proficient in risk and probability can empower you to make smarter decisions in our unpredictable world.

okay, that's it for this chapter.

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see you in the next chapter!