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msf has tried to do some of this sort of thing a few times, I think it is fair to say, but the article is nice and succinct, and it's instructive to fill out the Welch questionnaire even with guessed or madeup data.
Occasionally I do try to point out that odds may work fine in the aggregate, but as an individual you only get one roll of the dice. So those high odds of success are cold comfort if you're the one whose roll comes up snake eyes.
Sometimes though, the odds themselves are wrong, so it's important to also understand what underlies the figures. Houston comes to mind. Did it really have three 500-year floods in a row (odds of that: 125M:1), or were the odds wrong? I think the latter.
Urban planners (or lack thereof) who let miles and miles of payment go down on drainage acreage, real estate developers selling swampland (that didn't happen just in Florida), a national flood insurance program that subsidizes building in flood plains, global warming that exacerbates the effect of storms, ... Plenty of blame to go around, you don't have to pick them all.
Understanding where probability figures come from helps not only to evaluate how accurate they are, but to appreciate what it might mean if you wind up on the losing side. How mild or severe will a losing outcome be?
I'm a big advocate for integrating probability estimates into a decision process whenever possible. Sometimes it is not possible for various reasons like the data does not exist or the impact of the event on an individual is unknowable.
Knowing the event probability odds is only one part of the equation when estimating Expected Impact. The magnitude of the impact if it does happen must also be estimated. For many situations the entire process is an impossible task, but often it is a worthwhile approximation, even if it is crude. The quality of the inputs is an important assessment when judging its merits and shortcomings.
Fortunately, for many investments, an overwhelming quantity of first class data exists. Knowing and playing the odds likely increases an individual investors' performance. Here is a Link to a nice article that presents the stock market odds for various timeframes:
The significant takeaway from this article is that time works it's magic for the equity marketplace investor. Countless other more detailed and nuanced articles and studies demonstrate the same conclusion.
Thinking in a probability framework does enhance decision making when properly executed. It does have its limits and the usual "garbage in, garbage out" constraint applies.
Best wishes and enjoy a very Merry Christmas and a prosperous New Year.
All depends on what you’re putting at risk. If there’s a 90% probability of an investment paying off handsomely in a given period and only a 10% probability I’ll lose 25% of my money over that time I might go for it.
But, in Michigan in winter our thoughts turn to ice. Lots of deep lakes here that freeze over. Based on experience, the odds are that I can safely traverse a mile wide lake having a one-inch covering of ice - with about a 90% success rate. So the probabilities of remaining dry are very high. However, the 10% downside (200 feet deep cold water) is significant.
Comments
Sometimes though, the odds themselves are wrong, so it's important to also understand what underlies the figures. Houston comes to mind. Did it really have three 500-year floods in a row (odds of that: 125M:1), or were the odds wrong? I think the latter.
Urban planners (or lack thereof) who let miles and miles of payment go down on drainage acreage, real estate developers selling swampland (that didn't happen just in Florida), a national flood insurance program that subsidizes building in flood plains, global warming that exacerbates the effect of storms, ... Plenty of blame to go around, you don't have to pick them all.
Understanding where probability figures come from helps not only to evaluate how accurate they are, but to appreciate what it might mean if you wind up on the losing side. How mild or severe will a losing outcome be?
I'm a big advocate for integrating probability estimates into a decision process whenever possible. Sometimes it is not possible for various reasons like the data does not exist or the impact of the event on an individual is unknowable.
Knowing the event probability odds is only one part of the equation when estimating Expected Impact. The magnitude of the impact if it does happen must also be estimated. For many situations the entire process is an impossible task, but often it is a worthwhile approximation, even if it is crude. The quality of the inputs is an important assessment when judging its merits and shortcomings.
Fortunately, for many investments, an overwhelming quantity of first class data exists. Knowing and playing the odds likely increases an individual investors' performance. Here is a Link to a nice article that presents the stock market odds for various timeframes:
http://awealthofcommonsense.com/2015/11/playing-the-probabilities/
The significant takeaway from this article is that time works it's magic for the equity marketplace investor. Countless other more detailed and nuanced articles and studies demonstrate the same conclusion.
Thinking in a probability framework does enhance decision making when properly executed. It does have its limits and the usual "garbage in, garbage out" constraint applies.
Best wishes and enjoy a very Merry Christmas and a prosperous New Year.
But, in Michigan in winter our thoughts turn to ice. Lots of deep lakes here that freeze over. Based on experience, the odds are that I can safely traverse a mile wide lake having a one-inch covering of ice - with about a 90% success rate. So the probabilities of remaining dry are very high. However, the 10% downside (200 feet deep cold water) is significant.
Ice safety chart: http://midawnpatrol.com/know-ice-safe-walk/
Time to fire-up the blower.