Bets Worth Taking

BETS WORTH TAKING

When Elon Musk decided to start a space flight company, his friends thought he was crazy. Musk had just made over $180 million from the sale of PayPal, his second business, and he was betting most of that windfall on the company that would soon become SpaceX.

“You’re going to fail,” they warned him. “You’ll lose all your PayPal money.” One of his friends even put together a compilation of videos of rockets blowing up and begged Musk to watch it, in hopes of dissuading him from his pipe dream.

This is the point in most stories about someone with a “crazy dream” that usually goes something like, But he couldn’t be deterred, because he knew in his heart that the doubters were wrong. That is not how this story goes. When Musk’s friends told him that he would probably fail, he replied: “Well, I agree. I think we probably will fail.” In fact, he estimated that there was only about a 10 percent chance that a SpaceX craft would ever make it into orbit.

Two years later, Musk decided to invest most of the remainder of his PayPal profits into an electric car company, Tesla. That, too, he gave a roughly 10 percent chance of success.

The low odds Musk assigned to his own projects’ success left many people scratching their heads. In an appearance on 60 Minutes in 2014, interviewer Scott Pelley tried to understand Musk’s logic:

Elon Musk: Well, I didn’t really think Tesla would be successful. I thought we would most likely fail . . .

Scott Pelley: But you say you didn’t expect the company to be successful? Then why try?

Elon Musk: If something’s important enough you should try. Even if the probable outcome is failure.

Musk’s low expectation of success confounds people because they assume the only reason to do something is if it’s likely to succeed. But scouts aren’t motivated by the thought, “This is going to succeed.” They’re motivated by the thought, “This is a bet worth taking.”

Most people are already on board with the idea of a “bet worth taking,” in at least some contexts. To give a simple example, suppose someone offered you a bet in which you roll a normal six-sided die. If it lands on a six, you win $200; if not, you lose $10. Should you take it?

Almost certainly. This is a good bet for you—and you can see exactly how good it is by calculating its expected value. That’s the probability-weighted average of the possible net outcomes; repeated comparable bets help illustrate what the average means.

Probability	Value
1 in 6 chance of rolling a 6	Win $200
5 in 6 chance of rolling something else	Lose $10

To calculate a bet’s expected value, multiply the probability of each outcome by its value and then add up those results. For this bet, the expected value would be:

(¹⁄₆ × $200) + (⁵⁄₆ × −$10) = $33.33 − $8.33 = $25

In other words, if you took this bet many times, the average amount you would win each time is about $25. Not bad money for simply rolling a die! This is a great bet to take, even though the most likely outcome is failure.

Evaluating the probabilities involved in a real-life bet, like starting a company, is a much messier, more subjective endeavor. The possible outcomes aren’t well defined the way they are in the case of the die roll. Their corresponding probabilities are subjective. And their “value” involves many factors besides money: How much enjoyment would you get out of running a company? Would it leave you with useful connections and skills, even if it failed? How much of your time would it take up? How much social cachet (or stigma) would it involve?

A rough estimate can make assumptions explicit, even when it cannot settle the decision. In this account, Elon Musk estimated a 10 percent chance of success and a 90 percent chance of failure for Tesla. But the value of success would be enormous—taking the idea of electric cars from pipe dream to mainstream reality would go a long way toward freeing society from its reliance on fossil fuels. And even in the case of failure, Musk figured there was still one worthwhile thing Tesla would accomplish: “I thought that we at least could address the false perception that people have that an electric car had to be ugly and slow and boring like a golf cart,” Musk told Pelley on 60 Minutes.

Musk’s reasoning about SpaceX was similar: roughly 10 percent chance of success, 90 percent chance of failure. But the value of success would be huge. Developing a cheaper form of space flight would make it possible for humanity to one day colonize Mars, which would help safeguard our species against catastrophic risks on Earth. And even if SpaceX failed, it wouldn’t have been a total waste of time if they made a little progress: “If we could just move the ball forward, even if we died, maybe some other company could pick up the baton and keep moving it forward, so that we’d still do some good,” he reasoned.