Message Font: Serif | Sans-Serif
No. of Recommendations: 4
it's in the estimation of probabilities where people most often go wrong.

I concur with the idea that people often get probability estimates wrong. That is the reason I posted this HNR idea in the first place. I wanted to see if anybody had anything intelligent to say as respects the probabilities (but especially the outcomes) I set forth for this investment. No doubt about it, estimating probabilities is the most challenging part of investing.

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.

The problem is everything between 5% and 95%.

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.

As a result of this, I find that the idea of probabilistic investing is usually useless (despite the mathematics of it making perfect sense). Unless there is a 95%+ chance that a company is trading at a cheap valuation, I can't imagine making an investment.

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

Unless you've got a wealth of data that allows you to make precise estimates, thinking that there is a 70% chance of an enormous return just isn't good enough. For most people that 70% estimate could just as easily be 15%, regardless of how confident they are in their estimates of those probabilities.

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 look forward to reading your response. Thanks.
Print the post  


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.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! 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.