Dec 19, 2016
#56: Former professional Poker
player Billy Murphy has an intriguing story.
He achieved financial independence
at age 29, and he did this by applying a concept known as
"expected value" to his online businesses.
In this episode, I chat with Billy
about how expected value is more than just a formula; it’s a
framework for how to evaluate your options; how to assess risk,
reward, probability, and variance.
Let's back up a little. What is
expected value? It’s the sum of all possible values for a variable,
with each value multiplied by its probability of
“Whaaaa? What does that
Here’s a simple example:
Imagine that you have a full-time
job. You’ve also built a side business that’s earning $20,000 per
You’re trying to decide whether to
stay in your full-time job vs. quit your job and focus on growing
your side hustle into a full-time business.
You ask your two best friends for
their opinion. One says, “that’s risky! What if you fail?” The
other says, “you could become a millionaire! Whoa!”
You realize that both of those
remarks are fueled by emotion and speculation. You want to make a
more informed decision, so you decide to compare the ‘expected
value’ (EV) of both options in Year One.
After assessing the market (e.g.
studying customer demand, etc.) you determine that in your first
year of running the business full-time, under best-case-scenario
conditions, you could earn $250,000. There’s a lot of promise
within your field; you calculate a one in four chance of this
In worst-case-scenario conditions,
you don’t make a dime of additional money; your business stagnates
at its current income. There’s a lot of competition within your
field; you assess that there’s also a one in four chance of this
In middle-case-scenario conditions,
you’d make around $100,000 per year. This is the most likely
outcome, and you give it 50% odds.
What’s the expected value of diving
full-time into this business?
EV of biz =
25% chance of earning $250k =
50% chance of earning $100k =
25% chance of earning $20k =
EV = $117,500
Okay, great. Next, what’s the
expected value of staying at your current job?
EV of job = Salary + $20,000 in
Of course, this is an
over-simplified example, for the sake of illustration. Obviously,
the decision gets more complex, because you need to account for
future growth of your business — the 5-year outlook, the 10-year
outlook — as well as future career growth potential within your
9-to-5 job. You’d also need to assess revenues vs. profit margins,
But this simple example illustrates
the concept of using the expected value formula to inform your
decision-making. Rather than just saying, “oh, that’s risky!”
without any data, you can use EV as a starting point for a
conversation about probability and risk.
The point is, when you're making a
decision, your emotions and other people's opinions often override
any rational thought you might have. Those emotions don't
take risk or variance into consideration. Expected value
By running the numbers and
identifying the worst-, mid-, and best-case scenarios, you can take
calculated risks that have a higher likelihood of paying
Find out how Billy built a
seven-figure business by applying this one incredible rule to his
decision making process in this episode.
Find more about Billy Murphy and
his podcast, Forever Jobless, in the show notes at http://affordanything.com/session56