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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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Some downsides are unavoidable
Some downsides are unavoidable

Life is a little easier if you expect a certain chunk of it to go wrong no matter how hard you try.

Smart people screw up. Good people have bad days. Nice people lose their temper....

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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The Lessons Of History
The Lessons Of History

History is a treasure-house of learning, and as many books teaching us lessons from history point out, what was true in the medieval ages is often true even now, though the circumstances, technolog...

Voltaire
Voltaire

“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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Winning A Lottery
Winning A Lottery

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.

The Lottery ti...

The Steady Appeal of The Lottery

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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Gambler’s Fallacy
Gambler’s Fallacy

The odds are always fifty-fifty. But most of us anticipate better odds, or better luck, after a bad streak, as if now we are due for good luck.

This ‘Gambler’s Fallacy’...

The Biggest Bluff

Maria Konnikova, in her soon to be published book The Biggest Bluff, tells us that Poker is a real game, closer to life as opposed to the modern games which try to ‘game’ our brains’ and exploit its weaknesses.

Poker pushes us out of our comfort zones and illusions and puts us where life is, unpredictable, and always with fifty-fifty odds.

Too Much Of A Good Thing
Too Much Of A Good Thing

Good and effective things are helpful at one level but when taken too far, can be destructive.

In 1946, Sir Alexander Fleming, a renowned microbiologist, stated that antibiotics (like p...

Taking The Opposite View
  • In the field of investing, Contrarians take the opposite view, akin to cynicism, and think of the collective mainstream view as a kind of mass delusion.
  • Occasionally, a contrary view is welcome, but if it is done every time, then the good times when one has to simply ride the wave are missed, leading to bitterness.
Balancing Optimism
  • A positive attitude has the power to change our thinking and facilitate good things in our lives. Optimism surely beats pessimism as a worldview, when one has to pick a side.
  • Too much optimism turns into a delusion and eventually complacency. One starts getting out of touch with reality and lives in the mode of denial.

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Using Decision Trees
  • Understand the different outcomes that could happen (both positive and negative)
  • Calculate the expected return or loss of each outcome
  • Attach a probability to each outcome
  • ...
Use Decision Trees 

Elon Musk uses decision trees to make big decisions (a tool that uses a tree-like graph or model of decisions and their possible consequences, outcomes, and resources). They are particularly useful for avoiding stupid risks and big bets that aren’t likely to succeed.

Most became a billionaire by making unlikely big bets, as their expected return statistically was much higher than safer bets.

Build Deep, Long-Term Relationships

One of the best ways to get information is not from just being better at searching Google, it’s from learning how to build a network and get the information you need through that network. 

This network should include people’s lessons learned and hacks, topics that are too sensitive to talk about because they make someone look bad, and tacit knowledge (knowledge that people have but aren’t able to articulate).

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Influencer industry

The influencer industry has operated in boom times. As more Americans have taken their cues from social media about where and what to buy, brands started to use their marketing budget on influencer...

Reason for the negative impact
  • There is less money to go around. Since March, about a third of influencers were already seeing fewer collaborations.
  • This is also an awkward time to advertise, while so many are unemployed or facing a life-threatening illness. Brands don't want to alienate their market.
  • Some retailers are doing better, while other online retailers may not last. Categories like fashion, beauty, and luxury will likely suffer first and hardest.
Broad branding campaign

If a recession brings shopping to a standstill, marketers may not return to the type of broad branding campaign currently used in the influencer world.

Marketers are still in demand, but brands may demand evidence that the influencers give them sales, not just exposure.

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Every Decision In Life Becomes a Trade-Off
Every Decision In Life Becomes a Trade-Off

... and boils down to what we give up to attain something. Our mindsets are inclined towards pleasure and resistive towards pain. We normally like to think in terms of gai...

Good and Bad Decisions

Decisions are a cost-benefit analysis of risking something small for the opportunity to gain something big.

  • Good decisions can be: Exercising, meditating for 10 minutes daily, finding the courage and striking up a conversation with someone, applying for jobs that you may or may not get.
  • Bad decisions can be: lying or pretending to someone, driving unsafely, sending angry text messages, or staying up late drinking before an important meeting or exam in the morning.
Trade-offs and Life Values

Trade-offs are not something as simple as flipping a coin. Our values guide us towards what we want in life, and it is not the same for all. Example: Buying a house has a trade-off of mortgage for the next ten or more years. This is subjective and depends on what we value in life.

Indecisive people suffer because they don’t know their inner values and what they care about.

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Cautionary Hope
Cautionary Hope

Research shows that during disasters, altruism and kindness happen more than greed and selfishness. To tide over the current crisis requires optimism along with caution.

Action and accompli...

People With High Hopes

People with high hope have a good number of difficult, challenging goals, and a good scorecard of achievement.

They have lower rates of anxiety and depression and greater happiness. They cope well with problems that consume the rest of the world.

Hope = Goals + Agency + Pathways

Instead of wishful thinking, we need to know what we want (specific goals), and have the drive and passion to go towards it (agency) and should be able to generate methods and devices to achieve what we want (pathways).

When we do a sum total of these three, we get hope: Hope= Goals + Agency + Pathways

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