Value, Risk, and Reward

Sun Tzu taught that advancing in small, certain steps were always preferable to using larger, riskier steps. What science considers "illogical" choices are very logical when we factor in the difference between controlled environment, where planning works, and competitive environments, where strategy works. Good strategy seeks to exploit the mistakes people naturally make in calculating risk and reward. Planning assumes that the future is controllable and predictable. For example, 25 years ago, two psychologists Daniel Kahneman and Amos Tversky discovered that the different ways in which a message is presented or framed can result in very different responses. They concluded in their Nobel Prize winning research that "perception is reference-dependent." Their research focused on the very different ways that people process the probabilities of risk and the probabilities of reward. In general, they found that people overvalue more certain rewards but undervalue more certain losses. Sun Tzu suggests that the subjects were right and the scientists wrong in how they do these calculations. Real life is different than a laboratory experiment because we live in an uncontrolled environment where the future is never predictable. A certain reward NOW is more valuable than a 50% chance of a 150% greater reward. Why? Because, in the real world, people almost always overestimate the probability of future rewards and underestimate the probability of future losses. The "50% chance" can simply be wrong and, even if it is right when offered, it can always change,
    even in a controlled laboratory
. After all, the subjects don't know what is being tested. The offer could simply be a ruse as part of the experiment. The risk of losses is also stated too simply. A certain loss NOW is more painful than the 50% risk of a 150% greater loss in the future. By delaying a loss, the odds may change in the future. Real life is not life a game of poker, where you always know the odds because you know exactly what is in the deck. The deck of life has a surplus of wildcards.