Seth's Blog : Upside/downside

Upside/downside

The sensitivity analysis for a decision is easy to overlook, because we tend to focus on the expected outcome.

Perhaps it makes sense to begin with the edges instead.

Upside: If this works, really works, what are the implications?

Downside: If this fails, totally, what are the costs?

After we understand the edges, then it makes sense to be more nuanced about the chances of either happening and start discussing the likely outcome.

Want to try a brand new place for dinner? The worst that can happen is that you’ll waste a dinner. On the other hand, if it’s dinner with your new big account and the boss is coming, the worst that can happen is very different.

Should you buy a lottery ticket? Well, the big outcome is millions of dollars. The small outcome is a total waste. Now that we understand the extremes, perhaps it pays to realize that the odds of winning are essentially zero, so we ought to pass.

Don’t be dissuaded by the small or transfixed by the big. That’s only the first half of the calculation.

Of course, this is obvious. And yet we are rarely patient enough to do all the steps. (Driving to the airport is dramatically more dangerous than getting on a plane…)