Probabilities and Possible Outcomes

Thinking in probability distributions rather than point predictions—mapping the full range of possible outcomes and their likelihoods rather than focusing on the single most likely outcome. Bevelin and Munger emphasize that the expected value of a decision depends on ALL possible outcomes weighted by their probabilities, not just the most likely one. A strategy with a 90% chance of modest gain and 10% chance of catastrophic loss may have negative expected value despite being 'likely to work.'

When to use it

When evaluating any decision with uncertain outcomes; when a plan seems good but you haven't considered failure scenarios; when someone presents only the most likely outcome without addressing tail risks; when designing strategies that need to be robust across multiple scenarios.

How it can help

For any significant decision, map three scenarios at minimum: best case, base case, worst case—with estimated probabilities and values for each. Then calculate expected value: the probability-weighted average across all outcomes. This simple discipline reveals risks that single-scenario planning hides. The key insight: it's not enough to ask 'will this probably work?' You must also ask 'what happens in the cases where it doesn't?'