6 Examples That Can Help You Get Ahead In Life Using Probabilities
While thinking in terms of absolutes is easy, things aren’t usually black or white.
In the early 90s, a group of college students teamed up to make a fortune — playing Blackjack at casinos.
If you’re not a gambler, this might seem like the worst idea ever.
Not only is gambling morally questionable, the idea you can go into a casino — where the house always wins right? — and make consistent money is unbelievable.
Yet, that’s exactly what the legendary MIT Blackjack Team did. By the time they were done, one of the founders estimates they’d made more than USD6 million in profits. Since then, there’s been several books and Hollywood movies made about them.
The focus of this article isn’t about winning money at casinos though. It’s what we can learn about how they did it consistently — using a combination of math, probability and psychology. Because while many of us will never step foot into a casino, we all live in a complex world filled with multiple scenarios.
And in this sense, learning how to think and make decisions based on probabilities — a bit like a professional gambler — can help us in our lives.
This is how to live with probabilities and win.
The myth of the best answer
I don’t know about you, but in the environment, I grew up in, there was always a “correct answer” — the best thing to do in any given situation. Probably hammered into our minds by standardized exams.
Result: I’m naturally a bit of a one-track mind: If I don’t force myself to think critically, I tend to go “by the book.”
In reality, though, we live in a world where things aren’t usually black or white. It’s not just Option A vs Option B. It’s more like A, B, C,… X, Y, Z, AA, BB, CC… Throw in the time factor and you realize there’s actually an infinite number of possibilities.
Do you pick Option A today? Or do you wait for six months and try Option CC instead? Then, what do you do next? The truth is there are many paths, but you’ll never know for sure which is the best one.
Data & statistics — your best friends
Thankfully, we have the greatest friend known to mankind — data. So powerful and yet so underrated. And with the Internet, it’s available at our fingertips — mostly for free.
There’s a reason why books/articles/your university papers always need research behind them. Because in this era of #fakenews, data can give us evidence about what’s really going on in the world. And not only can it tell us what’s happened before, but it can also give us clues about the future.
Going back to the MIT Blackjack Team that won so much money. They didn’t do it by cutting a deal with the devil. Rather, it was mathematics. By keeping track of cards that had already been played, they calculated the probability of whether a situation was favourable or not. And when the situation was right — they bet money accordingly.
I won’t go into the details of card counting. But why I’m bringing this up is that card counting (done properly) only ever gave the player a slim 1-2% advantage over the casino. Even that was enough to make lots of money.
It’s not so much that they were able to predict the future. They just understood the probabilities enough to win.
The problem with stories
You can use this kinda thinking in many ways. In the next few sections, I’ll share some practical situations where probability can guide us.
We’ll start with one of the things that bug me most about the Internet. It’s our natural inclination towards extreme stories. For example, not many people would click this headline: “How to retire comfortably when you’re 65.” But we’re super-attracted to click-bait like “This 21-year old earned $5 million before he got his driving license!”
One of my biggest fears is we’ll all forget about moderation and start drifting towards extremist views. Another example: some bitch gets caught on a viral video being racist to a GoJek driver. Just one incident, but then a lot of people start thinking, “oh, all _____ people are like that.”
The human brain loves stories, and we always will.
But remember that large samples of data are a more accurate way to view the world than personal stories. Even if your beloved cousin tells you XYZ business is “guaranteed” to make you rich, while tearfully sharing how it changed her life from loser housewife to financial-freedom-supermom (while showing off her latest jewellery collection of course).
“What is the probability of that being true? What does the data across a wide sample of the population say?"
Investing and predicting the future
Which brings me to the weird and wonderful world of investment.
Did you know that in every company prospectus (the document companies ask you to read before you can invest), they always say something like the below?
Past performance is no guarantee of future results.
If you’re used to investing, you’ll already have gotten used to this. But for those who are new — this might sound crazy: “You mean there are no guarantees? So why the f*ck do they put in all these fancy charts showing people made money?”
How do we reconcile this?
First of all, it is true that nobody can predict the future. But remember how the past can give us hints about the future? I can’t say what will happen tomorrow, but I can tell you what’s happened over the past few decades. For example, (after deducting inflation):
1. The USA S&P 500 stock market index has returned around 7% per year
2. Bonds (in 16 advanced economies) have returned around 2.5% per year
3. The Malaysian EPF has returned around 2.5% per year
This is why even safe investors put money into the stock market. Short-term swings may look scary, but in the long-term, stocks have historically done well.
This is also how we know your dodgy friend’s “business opportunity” promising 20% per month is bullshit.
Hedging your bets
Does that mean you should invest all your money into the stock market?
No, we’re probabilistic thinkers so we don’t jump to simple conclusions like that. The flip side to investing is there’s always a risk. Higher return, higher risk.
That’s why investment advisers will always ask you to invest in a portfolio, a mix of investments that consists of some higher-risk stuff, with some lower-risk stuff to balance it out.
There’s a lot of maths that goes on behind this. Answering complex questions like:
1. I’m willing to handle X amount of risk. Which assets should I buy to get the best returns?
2. If 1% of my portfolio is in risky stuff that has a 90% chance to go to 0, how many percents of my portfolio should be in safe stuff that has a 90% chance of earning 3%?
3. I started investing when I was single at 30. Now that I’m 40 and have a family, how should I adjust my portfolio?
Super difficult stuff. But thankfully, in today’s world, we have apps like robo-advisors to help with math and make it really simple for you.
Of course, all this is assuming the world continues to chug along as it has. We also know that every once in a while, Black Swan events — extreme things that no one predicted — happen and disrupt everything. This is where things get really interesting.
Bet small, win big
Which brings us to a powerful concept called asymmetric opportunities.
Knowing how the world continues to change, how should you live your life to maximize chances for success?
For me, I’d suggest getting involved in asymmetric opportunities. Things you can try with very low risk to yourself, but in the (small) chance that they succeed — could bring huge benefits.
For examples, I call upon the wisdom of Twitter:
Let’s consider going on a first date. The worst thing that could happen is you waste a bit of money for coffee, and perhaps three hours of your time. (Yeah, it could be worse if your date is a serial killer, but that’s why we take safety precautions.)
The best thing that could happen is you both end up falling in love and start an amazing family together.
Yes, you still have to risk something. For the important things in life, you always will. But when the potential rewards are so huge, these small bets are worth it.
Love: Instead of getting depressed over one person who suddenly stops replying your messages, you realise maybe you need to meet 10 new people — before you find someone compatible.
Career Moves: Instead of looking for stability with a well-established company in a well-established industry, you consider new industries. If you’re young and can take a bit more risk — where do you think you’ll grow and learn the most? (Hint: usually not a big company with 50,000 people.)
Salary Negotiation: Instead of asking for a salary just 20% above your current salary, you look at the market research data. If 10,000 other senior executives are getting paid between RM4,000 to RM6,000 for a similar role — maybe you should be getting paid that too.
Passion: Instead of giving up because nobody buys your art, you start learning about conversion funnels. You realise you need more website visits to get more customers e.g. you need 1,000 visitors because only 20% will click “Buy Now.” And of the 20% who click “Buy Now,” only 10% will actually make payment: your first 20 customers.
Thinking in terms of absolutes is easy. If you ever catch yourself saying something similar to below, that's just your brain being lazy:
1. “I just lost the love of my life. I’ll never find anyone again.”
2. “My money is gone. ‘Investing’ is a scam.”
3. “The presentation was terrible. My reputation is forever tarnished.”
But if you want to achieve more success, remember that life isn’t a series of black-and-white situations and choices like a chess game. Instead, it’s this beautifully complex canvas where a billion shades of anything can be painted.
So the next time you face an important decision, apart from having faith and optimism, add this question to the way you think: “What are the probabilities?”