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Why We're Blind to Probability · Collaborative Fund

Black And White

  • The pandemic death toll predictions are probabilities but the newspapers keep them as benchmark numbers which will be held against the experts.
  • In investing, stock predictions that come true are hailed on CNBC, as if those people have some superpower.

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Why We're Blind to Probability · Collaborative Fund

Why We're Blind to Probability · Collaborative Fund

https://www.collaborativefund.com/blog/why-were-blind-to-probability/

collaborativefund.com

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Key Ideas

Probability

Most of us understand probability and the likelihood of certain things to happen, or not happening, but still do not fully believe in it. For us, it’s about right and wrong, black or white.


Example: Nate Silver(a numbers guy) said in 2016 that Hillary Clinton has a 72 percent chance to win. This didn’t mean he was wrong when Clinton lost, but most people believed he was.

Black And White

  • The pandemic death toll predictions are probabilities but the newspapers keep them as benchmark numbers which will be held against the experts.
  • In investing, stock predictions that come true are hailed on CNBC, as if those people have some superpower.

Ignoring Probability

Probability gets sidelined because:


  • People want certainty, not accuracy. It’s more appealing to make them feel better(with lies, if required) than to give them cold, hard data.
  • There are not many chances to measure our prediction skills, with sufficient sample sizes taking long to play out.
  • People don’t really understand what odds mean, as their beliefs and preferences of what should happen, takes precedence over probability.

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How we think about risk and opportunity

It’s impossible to think about risk and opportunity without a reference point. And ours is at most incomplete (if not totally wrong).

Everything we think about risk and opportunity is shaped by our own specific situation and personal experience. So everybody has a view of risk shaped by narrow experiences but applied to the broad world.

Long-term and short-term thinking

Long-term thinking is difficult to put in action because the long run is a collection of short runs that have to be handled, displayed, and used as information to gauge whether a long-term reward still exists.

Short-term thinking can be the only way you’ll survive long enough to experience long-term results.

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“History never repeats itself, but man always does.”

1920 and 2020

1920 is a hundred years apart from 2020, yet how people think is largely unchanged. Human behaviour is still hinged on greed, fear, opportunity, scarcity, and basic instincts.

We have no idea what will happen in the future, but we do have a good idea about how human beings might behave in certain situations.

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Human beings are not wired to grasp the concept of probability. A chance of winning a lottery, sometimes 1 in 175 million, is not something that bothers us.

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The steady appeal of the lottery is due to various psychological tricks by the marketers: suspension of logic and reason and the dreams that it sells.

Using the variable rewards concept of psychology, the marketers ensure that people keep buying their tickets for years, by introducing smaller wins with much better odds. This helped lottery buyers experience the thrill of a win.

Playing the Lottery for Entertainment

The odds to win are so small that winning does not even feature in our decision matrix of buying a ticket. The game of lottery isn’t played on logic, or for investment, but for entertainment.

For as little as two dollars, a person dreams of getting a chance to win thousands of dollars, and that dream is worth the price of the ticket. The bigger the jackpot is, the more the dreams are fed.

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