Probabilities are complicated - How YOU misjudge uncertainty!

in Project HOPElast year

Probabilities

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The probability of an event tells us how likely it is no happen in the period of time we're considering.

They can range from being infinitesimally small, like the chances of an asteroid colliding with Earth, to near-certain, such as the likelihood of the sun rising tomorrow.

Humans and Uncertainty

Probability allows us to rationally look at uncertain events, and determine how we should act, based on those values.

While humans are great are creating tools, like math, to help deal with problems, uncertainty, we are also very bad at understanding them instinctually.

Nothing is impossible

Low probabilities should always be taken into account, without being over or underestimated.

In the case of Investments, often the probability of catastrophe or major recession is overlooked by amateurs, focusing only on the more probable events.

On the other hand, these extreme scenarios shouldn't be exaggerated. A 1 in 100,000 chance of your portfolio losing all it's worth shouldn't stop you from investing completely.

Nothing is certain

There are no 100% certain events in real life, only in math exercises.

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Again from the investor perspective, even the safest bets carry Risk.
Namely, government Bonds, which are usually considered risk-free, can end up not being repaid.

Conclusion

Our brains are wired to simplify situations, and this usually means considering low probability events impossible and high-likelihood ones guaranteed, even if it isn't quite true.

Have you ever noticed any of these approximations in yourself or the people around you?


Thanks for reading!
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Take a look at my last post, about Investments and Psychology:

Images from: Unsplash and Pixabay


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