If anyone of you are into poker or Fantasy premier league you may be aware of the idea of making positive expected value decisions. This is a great framework for making decisions that have uncertainty or risk associated with them. This is obviously the case for flipping markets, so let’s dive into this idea.
What is expected value
Expected value is a term from probability theory which refers to what your payoff from a certain decision is based on all possible outcomes. In the case of a lottery ticket this would be the percentage of tickets that win any particular prize multiplied by that prize, and then you sum it all up and compare it to the cost of a ticket. For lotteries this is always negative as that’s the only way the lottery company makes money.
+EV in other contexts
Positive Expected Value or +EV is a common term in poker theory. You want to make the right bet size or fold that maximizes your winnings over all potential cards your opponents may have and which cards may be coming. Poker has a ton of variance so you may be making +EV decisions and still lose a lot of money in the short term. Gold making luckily has much less randomness, but the framework is still useful as you have no idea what will happen over the next week, month or year.
Appliying it to decision making
The idea is simply to consider all possible outcomes before making a decision and trying to ensure your decision will be profitable on average if you played out the subsequent scenario thousands of times.
For flipping this will mean that you accept that some of your purchases will turn into losses, as long as you are profitable on average in that particular market.
Can you use this while flipping?
I’ve actually implemented this idea in my material flipping settings. I used to have a check that was based on my average buy price to ensure I never lost gold. I don’t anymore I just let both my thresholds change with dbmarket.
On average this approach will be profitable, but I will take losses when the price goes down on an item, which obviously happens with semi-regular frequency.
Plan to minimize losses, not eliminate them completely
Ultimately it is about accepting the fact that you may incur losses and trying to make sure that they are small enough that you are still profitable in the long run. Having this awareness means you will take easier when you lose out some gold. You will also be making a profit which is the main point of this.
A simple framework
For any flipping markets a simple way to compute your expected value is to compare your minimum auctioning price to your maximum shopping price. A large difference will decrease the chance you lose gold, while limiting the number of deals you can find.
Never expect to sell items for more than dbmarket, as it is just in some select markets and on some realms. An even safer approach would be to compare your purchasing price with the region sale average price which is generally much lower than dbmarket. It does depend on the realm though and on some high pop realms dbmarket may be higher.