This extended audio edition presents a detailed exploration of the February 2025 article by Michael J. Mauboussin and Dan Callahan, CFA, focusing on the central role of expected value in investment decision making. The episode explains why understanding both probabilities and payoffs is essential for long term success, highlighting the distinction between the observable price of a security and its far more complex underlying value.Key concepts include the Babe Ruth effect, which illustrates how the magnitude of gains can outweigh the frequency of losses; the impact of behavioral challenges such as loss aversion, overprecision, and confirmation bias; and the importance of using base rates and quantified expectations to improve forecasting accuracy. The audio also compares how different asset classes such as public equities and venture capital exhibit distinct return distributions, shaping their risk reward profiles. Principles like the Kelly criterion and margin of safety are discussed as tools to guide portfolio sizing and decision making in non ergodic environments where outcomes do not naturally average out over time.Explore more episodes and playlists from ValueLettershttps://www.youtube.com/@ValueLetters/playlistsSource:https://www.morganstanley.com/im/publication/insights/articles/article_probabilitiesandpayoffs.pdf#MichaelMauboussin #DanCallahan #ExpectedValue #ProbabilitiesAndPayoffs #BehavioralFinance #InvestmentThinking #KellyCriterion #MarginOfSafety #ValueInvesting #DecisionMaking #RiskManagement #ReturnDistributions