Odds Over Outcomes

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If you knew the odds of any specific outcome was 85% in one direction or another, what would you do? 

In previous notes we’ve broached the subject of discounting outcomes; today we’re going to discuss placing the odds in our favor, displaying it in real time… 

We titled a section, “Cloudy with a chance of Meatballs” in our 4Q2017 note (an homage to the children’s film after having watched it with my daughters). In that section we said:

If the weather report suggests a 20% chance of rain tomorrow, how many people would carry their umbrella? Be truthful – the answer is virtually no one. Human behavior suggests most people either round large probabilities up to 100% likewise, they round small probabilities down to 0%; but if it actually rained, most people would more than likely be upset with the weatherman…

For decades studies have shown we discount the minority percentage of most outcomes to zero and while inflating sizable favorable outcomes to 100%. Since our writing in 2017, World series poker champion Annie Duke has written and released “Thinking in Bets; Making Smarter Decisions When You Don’t Have All the Facts”. It’s the largest compilation on the subject (written in plain English) I’ve seen as she cites more sources than this note has room to tackle. I highly recommend the read, you’re likely to learn quite a bit about your own decision making.