Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (61) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: educatedidiot Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41315  
Subject: Re: HNR -- The fish Pabrai didn't throw at VIC Date: 5/29/2007 8:26 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
I don't think "the estimation of probabilities is where most people go wrong" though. I don't think most investors even think in probabilistic terms.

Definitely, that's why I joked that this topic tends to be brought up more often in theoretical discussions rather than practical ones. I meant that for anyone attempting to apply a probabilistic approach, the estimation of probabilities is the problem.

Agreed again. The A-bomb scenarios, fraudulent management, etc can usually be whittled down to < 1%. Like you said, the problem is everything between 5% and 95%. That is why the odds have to be drastically in one's favor before placing a big bet. It has to be obvious, given that you have a sufficient set of facts to base a decision on. Naturally, these types of opportunities usually only present themselve under extreme circumstances (HNR, Chrysler, American Express, Geico, Washington Post, etc). They are rare, all the more reason to bet big when you come across them.

Maybe its just a matter of definition then, but to me, for the odds to be drastically in my favor, I have to have come to the conclusion that the horrible outcome is extremely unlikely to occur (i.e. less than 5%). As I said before, that's because it's usually impossible for me to really know whether something is 20% likely vs. 40% vs 60%.

You're right on when you say that estimating probabilities is where most mistakes are likely to occur (for probabilistic investors, anyway). But, in my mind, that's no reason to dismiss it as something that works in theory but not in practice. It does work in practice if done correctly.

While I can't rule out that there are certain individuals that are somehow blessed with a unique ability to assess probabilities with limited amounts of information, my experiences suggest that these individuals are exceedingly rare.

Speaking of working in theory and not in practice, your post sounds somewhat EMT-ish. Do you think markets are strong-form efficient?

Not sure what gave you that idea, but definitely not. Most markets seem to me to be highly inefficient.

I disagree. Do you have a reason that backs up why you think it is improbable that HNR's contract gets approved? If so, I may agree with you and I would love to hear your thoughts. But just saying that that may be the case because people can fool themselves into believing what they want to believe, or believing what their limited memory/experience suggests is correct, isn't a selling point for me. That's just me though.

I have no opinion on the probability of HNR's contract getting approved. I don't think that I'd be able to convince myself that its <5% likely, so for me its not worth thinking about. My post wasn't meant to be specific at all to HNR. I have no opinion on the company whatsoever. Just run through this exercise for yourself (no need to share it with the board): take your probabilities, add/subtract 20-30% to them, and formulate an argument for why the new probability distributions aren't right. Ask yourself honestly how compelling you find those arguments. If it works for you, then that's great! Absent great data or relevant historical knowledge, I just think that's a difficult thing to do.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (61) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Value Hounds

My Big Fat Greek Splat
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement