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Tools for Navigating the Unpredictable

By March 30, 2024No Comments

Hi All!

Here is my weekly letter discussing mental models, performance, business and entrepreneurship.

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What’s in today’s newsletter?

  • Uncertainty is Inevitable, Probabilities are Powerful: Life isn’t about perfect answers. Probabilistic thinking helps us accept that uncertainty is the norm, and gives us a way to make smarter decisions even when things aren’t guaranteed.
  • Informed Choices, Not Blind Hope: Instead of clinging to a single desired outcome, we consider a range of possibilities. This involves assigning probabilities to different scenarios and understanding their potential impacts on our lives – both positive and negative.
  • Strategic Action, Not Paralysis: Probabilistic thinking doesn’t eliminate risk, but it helps us get smarter about it. With this mindset, we can take calculated actions, prepare for likely scenarios, and remain adaptable to unexpected changes.

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Unlocking the Power of Probabilistic Thinking

Imagine facing a big decision, the kind that can change the course of your life. Maybe it’s a risky job offer, a potential move, or starting a long-dreamed-of side hustle. You can feel the excitement, but also that nagging question: what are the chances it will actually work out? That’s where probabilistic thinking steps in. Today, we’re learning how this approach can help us tackle that uncertainty…

We want simple answers – yes or no, good or bad. But the real world doesn’t work that way (as much as it would be nice if it did).

Life is full of possibilities, not just black and white.

We want to be sure about the future, but it’s always a little bit unknown. That’s why we need probabilistic thinking – it helps us make better decisions when nothing is certain.

Imagine you’re at a crossroads with lots of paths instead of just two.

Old-fashioned thinking says there’s one ‘right’ path to take. But what if there are tons of paths, some good, some bad, all leading different places?

Probabilistic thinking helps us figure out which paths are most likely to get us where we want to go, even if we can’t be 100% sure of what we’ll find.

The Power of Probabilities

Instead of asking a simple “Will this work?” you’re going to start asking questions like “How likely is this to work?” or “What’s the probability of different outcomes occurring?”.

Yes, It’s a subtle change, but it has massive implications. We move away from chasing absolutes.

We move from chasing absolute certainty to assessing probabilities, from demanding guarantees to making informed bets.

Here’s why this mindset is transformative:

  • Smarter Decisions: When you start seeing the world through a probabilistic lens, you’re able to weigh options against their potential benefits, even when you don’t have all the answers. You avoid the trap of binary choices and open yourself to a wider range of possibilities. You play the odds.
  • Mitigating the Unknown: Probabilistic thinking also helps us see potential pitfalls lurking in the shadows. By assigning probabilities to less likely but still impactful events, we can plan accordingly. A rainstorm might be low-probability, but it becomes a damn important consideration if you’re going on a 5 hour hike. This kind of preparation can be the difference between getting caught in a downpour and enjoying the scenery (in a raincoat).
  • Embracing the Unexpected: This mindset trains us to be mentally agile. Instead of being paralyzed by change, we expect the unexpected and adjust our course accordingly. We understand that low-probability events, by their very nature, do happen, and this prepares us to seize opportunities when others only see chaos (and react thoughtfully).
  • The Calibration of Predictions: One of the key goals in probabilistic thinking is to improve the accuracy of our predictions over time. We track our estimates, see where they were accurate and where they weren’t so correct. This feedback loop is important for refining our ability to understand how likely certain events are, which basically just optimizes our decision making skills.

Tools for Navigating the Unpredictable

How do we actually use probabilistic thinking? Here are a few key ideas:

  • The Wisdom of Bayes: Thomas Bayes, an 18th-century mathematician, gave us a way to think about updating our beliefs when we get new information. Imagine crime seems to be getting worse in your town. Should you panic? Bayesian thinking says to compare it to past crime rates – is this a small jump, or a serious change? It’s about adjusting your views as new facts come in.
  • Expect the Extremes: Some things in life are predictable (your height won’t change much). But other things, like the stock market or your career path, can have huge, surprising ups and downs. Understanding that these extreme events (good or bad) are more likely than we think helps us plan realistically.
  • Watch Out for Your Brain’s Tricks: Most of us are way too optimistic. It’s important to remember that when making estimates. Also, be aware of the ‘sunk cost fallacy’ – that urge to keep going with something because you’ve already put in time or money, even if the odds of success are low.
  • Think It Through: Play with “what if” scenarios in your head. What’s the absolute worst that could happen with that job offer? The very best? Thinking about the extremes helps you see possible problems or awesome opportunities you hadn’t considered.

Where Probabilistic Thinking Helps Us Win

This way of thinking is key to handling complicated situations in almost every part of life:

  • The Smart Entrepreneur: Successful business owners know it’s not just about one great idea. It’s about trying things, understanding that some will fail, and learning from them. They analyze markets, look at competitors, and predict different possible outcomes.
  • The Wise Investor: Great investors don’t bet everything on a single stock, no matter how hot it seems. They study the basics, watch market trends, and weigh a whole range of possible returns. Probabilities are the secret language of smart investing
  • Life Choices: Even personal decisions can use this approach. Should you take a job for less money now but more growth potential? Should you move to a new place even if it’s a bit scary? There’s no right answer, but thinking in probabilities helps you weigh the odds.

Think Like a Forecaster, Not a Prophet

Probabilistic thinking isn’t about seeing the future perfectly. It’s a way to understand and deal with a messy world. The only thing we can be sure of is that things won’t go exactly as planned!

The best part about this mindset is that you get better with practice. You learn from your successes and failures, updating your guesses over time. We become better at seeing possibilities and risks, allowing us to make strategic choices, not just blind leaps of faith.

In a world obsessed with simple answers, probabilistic thinking is refreshingly realistic. It lets us embrace the fact that things won’t always go our way, but also that the unexpected can lead to amazing opportunities.

Ultimately it makes life a little less scary.

Framework for Probabilistic Decision-Making

Before I leave you, here’s a framework I put together, something simple hopefully you can apply going forward.

1. Define the Problem (Or Opportunity):

  • Go beyond the surface-level question. What are the underlying factors driving your uncertainty?
    • Example: “This job offer has higher pay, but my current position feels stable. Am I truly looking for greater risk and potential reward, or primarily seeking improved financial security?”

2. Explore the Full Spectrum of Outcomes:

  • Brainstorm a wide range, from highly positive to highly negative. Don’t self-censor!
  • Consider both immediate and long-term consequences.
    • Example: Job offer leads to promotion (great now, but what about work-life balance down the line?), Backfires (bad in the short-term, but could it force a beneficial career shift long-term?), Stagnation (disappointing initially, but maybe this frees up time for a passion project).

3. Assign Probabilities (With Caveats):

  • Estimate the likelihood of each outcome. Use past experience, research, and intuition.
  • Acknowledge that these are rough estimates. The goal is to understand relative likelihood, not pinpoint precision.

4. Factor in Values & Trade-offs:

  • What truly matters to you? Does stability outweigh potential gain? Does personal growth justify initial discomfort?
  • Are there potential gains or losses beyond the obvious ones? (Reputation, time, relationships, etc.)

5. When Comparing Choices, Dig Deeper:

  • Apply this framework to each option.
  • Look for hidden trade-offs. Does the seemingly ‘safe’ option carry the risk of regret or stagnation?

6. Embrace the ‘Maybe’ (Strategically):

  • Probabilities aren’t guarantees. Prepare contingency plans for likely scenarios.
  • Could you ‘test the waters’ with a smaller commitment before a bigger leap?

7. Track, Analyze, and Improve:

  • Did your predictions reflect reality? Where were they accurate, and where did they go wrong?
  • Use these insights to refine your probabilistic thinking over time.

Advanced Considerations:

  • Beware of cognitive biases: We tend to be overconfident or overly focused on recent events. Be mindful of your mind’s tricks.
  • Consider ‘Black Swan’ events: Can you foresee any low-probability but high-impact events? It’s okay if you can’t imagine them all, but acknowledging the possibility helps keep us adaptable.
  • Seek outside perspectives: Our own biases are hard to spot. Discuss your thought process with someone who has a different viewpoint.

Remember: Probabilistic thinking helps us make informed decisions in an unpredictable world. It’s a tool for navigating uncertainty strategically, turning anxiety into calculated action.

Don’t bet on fate, bet on the odds. Play the long game, not just the next hand.

Scott


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