Probabilistic Thinking: The Mental Model to Help You Make Better Decisions Under Uncertainty

personal995
Aug 21
5 min read

Our biology doesn't like uncertainty. It feels uncomfortable. If you can work through this, it gives you an edge.

Most of us think in terms of yes or no, will or won’t, success or failure. It feels decisive, but it’s often wrong. The world isn't that clean. It's rarely black-and-white, it’s messy, uncertain, and full of unknowns.

Probabilistic Thinking helps you make good decisions when others freeze, panic or 'flip a coin.' If you can work through this discomfort and move forward making the wisest possible decision under the circumstances, you have an edge others don't.

What’s in this article?

Definition of Probabilistic Thinking
Some History of Probabilistic Thinking
Probabilistic Thinking in Daily Life
Three Tips for Applying Probabilistic Thinking
To Summarise
Member's Related Readings

What Is Probabilistic Thinking?

Probabilistic Thinking means assessing the likelihood of different outcomes and making decisions based on those probabilities, weighted by their potential impact.

It replaces certainty language (“This will happen”) with probability language (“There’s a 70% chance this will happen, and here’s what I’ll do if it doesn’t”).

The key is to combine two factors:

Probability: How likely is each possible outcome?

Impact: If it happens, how big is the effect (good or bad)?

This approach gives you a clearer picture of risk and reward, making your decisions more rational and less emotional.

Note: Probabilistic thinking naturally leads to considering options in if/and/or terms, which in turn connects to other decision-making models, such as the OODA Loop. Further improving the outcomes of your decision making.

Member's Useful link: Aspect 31: Astuteness

Some History of Probabilistic Thinking

Blaise Pascal & the Birth of Probability In the 17th century, French mathematician Blaise Pascal corresponded with fellow mathematician Pierre de Fermat about gambling problems - how to split the pot in a game cut short. Their work laid the foundation for modern probability theory.

Thomas Bayes & Conditional Probability In the 18th century, Thomas Bayes developed what we now call Bayes’ Theorem, a formula for updating probabilities based on new information, a crucial tool for decision-making in uncertain environments.

Modern Application: Warren Buffett & Charlie Munger In modern investing, Warren Buffett and Charlie Munger are well known for treating decisions as bets with odds, rather than certainties. They consistently weigh both probability and payoff, choosing to act only when the odds are strongly in their favour. This probabilistic mindset has helped them avoid unnecessary risks, concentrate capital in their best ideas, and compound wealth over decades.

“It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.” Charlie Munger

Probabilistic Thinking in Daily Life

Do You Really Need Two Cars? Most families assume:

“With kids, jobs, and activities, two cars are a must.”

But probabilistic thinking asks: How often do we really need both cars at the same time, and what’s the cost if we don’t have one?

Say you track it for a month:

70% of days, one car is enough.
25% of days, it’s inconvenient but manageable (e.g., shifting schedules, ride-hailing, borrowing).
5% of days, you truly need a second car.

Now weigh the costs:

Owning a second car costs ~$8,000 per year (depreciation, insurance, fuel, maintenance).

On the rare 25% and 5% of days you need one, ride-hailing or rentals might cost $20 - $100 per day.

Then add the power of compounding:

If you don’t tie up $30,000 in a depreciating asset, and instead keep it invested earning, say, 5% annually (or if borrowed to purchase a car - saving the interest you would pay), that’s an extra $1,500 per year compounding quietly in your favour.

So not only do you avoid $8,000 in annual car costs, you also gain $1,500 in investment income, $9,500 total.

That is quite a lot of rentals or ride hailing.

In short:

Potentially, what feels like certainty (owning two cars) is actually the riskier bet. Bleeding money every year. And what feels like risk (relying mostly on one car, occasionally renting and ride-hailing) is probabilistically the smarter, safer play.

Member's Useful link: Mental Models in Maths & Science

Three Tips for Applying Probabilistic Thinking

Tip 1. Replace Certainty With Ranges

Instead of saying, “This task will take 2 hours,” try: “There’s an 80% chance it will take 1.5–2.5 hours.”

Why it matters: thinking in ranges turns rigid plans into flexible ones, reduces stress when things run long, and helps you make realistic commitments.

Tip 2. Focus on Probable Outcomes, Not Extremes

Instead of fixating on the absolute worst-case or hoping for the best, estimate the outcomes that are most likely and plan accordingly.

Example:

You’re deciding whether to take on a new project at work. Rather than imagining it either fails completely or becomes a runaway success, break it down: there’s a 70% chance it delivers moderate success, 20% chance of high success, 10% chance of failure.

Allocate your time and resources proportional to these probabilities. Put in enough effort to capture the likely gains, without overcommitting to a low-probability upside.

Why it matters: by focusing on what’s probable rather than extreme, you make smarter, lower-risk decisions that maximize results over time, rather than gambling on unlikely outcomes.

Tip 3. Update as You Learn (Bayesian Thinking)

When new information appears, adjust your probabilities. Don’t cling to old assumptions just because you initially guessed them.

Example: if a project you expected to succeed faces a new competitor, recalculate the odds and adjust your effort or resources accordingly.

Why it matters: life is uncertain, but constantly updating your beliefs keeps your decisions aligned with reality.

Member's Useful link: Aspect 34: Judgement

To Summarise: Probabilistic Thinking as a Mental Model

Probabilistic Thinking doesn’t just help you make decisions, it lets you play life like a strategist.

By assessing both the likelihood and impact of outcomes, you can focus on opportunities where the odds are in your favour and minimize costly mistakes.

You don’t need to be right every time. What matters is consistently making high-quality bets that tilt the long-term game in your favour. Over time, these small, smart moves compound into outsized advantages.

While most people react to uncertainty with fear or guesswork, probabilistic thinkers act deliberately, exploit asymmetries, and turn the messy, unpredictable world into a place where your decisions reliably increase your upside and protect your downside.