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How Accurate is My Judgement When it Come to Finance?

Short story: Shit.

Long story:
As we’ve said before, one of the most important factors in investing is being able to assess how likely something is to happen. This can be applied to almost everything. From how likely the Celtics are to cover the spread to how likely America is to bomb (insert Muslim country here) to how likely you are to have to sleep on the couch when you forget your anniversary, everything can be reduced to odds given the information you have available.

But it’s also more complicated than that. Because your ability to assess risk or likelihoods is far from perfect. In fact, if you are just starting out, you probably stink at it.

Think of it for a statistical point of view: think of 10 things that you believe strongly… So strongly that you think they have a 90% chance of being true. Statistically speaking, one of them has to be wrong.

But it’s likely more. A lot more.  The above scenario neglects the fact that we as humans tend to not question information that tells us what we want to hear, and tend to ignore or attack information that tells us things that we don’t want to hear.  We add more weight to the information we here more often, and discounts information that we rarely or never hear.  Anecdotal evidence carries more weight than statistical because anecdotal evidence comes with a story that we can get emotionally invested in.

For example, do you happen to think that the world is getting more violent and angry?  You would be wrong. In fact, the world has never had it so good.  But one could not blame you for believing that. With the advent of 24-hour news networks that make money through advertising and get you to watch by showing you the most shocking thing they can come up with, it would be easy to believe that the world is descending into chaos.

And these biases and cognitive shortcomings mess with our ability to predict the future.

So how can we combat them?

I’ll leave that for another day, but just to be aware of them (and thus not take your conclusions as if they were carved by a god in stone) is a great start.  Just by knowing that we are less likely to take our own perceptions too seriously, or to find ourselves losing our compsure when faced with the differing perceptions of others.

One Comment

  1. gundam says:

    thanks.very good blog and very good share.

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