When Education Isn't Worth It

October 19, 2020

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Denise and Chris Arand

Denise and Chris Arand

Executive Vice Presidents/Financial Strategists

2173 Salk Ave
#250
Carlsbad, CA 92008

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October 5, 2020

What Are The Odds?

What Are The Odds?

Your brain is more powerful than any computer on the planet.

It can store roughly 2.5 million gigabytes of information.¹ Yahoo’s colossal data warehouse can only store 2 million gigabytes.² And your brain does it with the same energy it would take to light a light bulb, not a huge power grid!³ But all that computing firepower still doesn’t help the brain understand one simple concept: probability. Which is unfortunate, because misunderstanding the odds of something happening can seriously impair your decision making, especially when it comes to money and finances. Let’s take a look at the problem of comprehending probability, how it impacts your money, and a simple strategy to counteract it.

We don’t understand probability
It’s a scientific fact that humans struggle to properly understand probabilities. A 2018 meta-analysis from the University of Rensburg found that presenting people with probabilities often results in potentially huge errors of judgment.4 For instance, a woman was wrongfully charged with the murder of her sons because a medical professional testified to the low probability of their dying naturally.

Part of the problem is presentation. The meta-analysis showed that presenting tasks as natural frequencies (i.e., 1 out of 10) instead of percentages (10% chance of something happening) actually increased peoples’ performance in understanding the probability they were presented with. Even then, the leap was only from 4% to 24%. You still have merely a 1 in 4 chance of effectively grasping a probability! So while presentation helps, it doesn’t address the deep-seated mental block people have regarding understanding odds. Humans just seem to overcomplicate, misinterpret, and misconstrue probability.

Probability and Money
But does that really matter if you’re not buying lottery tickets or spending weekends at the races? You might be surprised by how often our inability to understand chance impacts our money decisions. There are countless examples. You want to start saving and investing your money. You’ve figured out that buying when the market is low is the best way to maximize your dollar. You hold back, waiting to time the market for that dip that’s certainly right around the corner. Perhaps you decide to start a business right when the economy is cooking. The DOW’s been climbing for the last three years, so there’s no reason for it to stop now, right? Or maybe you’ve held off on buying life insurance because the odds of your suddenly passing away are one in a million. Those are all instances of risky behaviors that stem from an innate human inability to grasp probabilities.

How a professional can help
But there’s a surprising solution to the probability problem: education. Ask a mathematician to gamble on a coin toss. They’ll choose either heads (or tails) every time. Why? Because they know how probability works and don’t let a few flips throw them off. It’s a 50/50 chance every time the coin is tossed, so why try to game the system? Your personal finances are no different. You need someone on your side who knows the math, knows the economy, and can guide you through a run of bad luck without losing their head. You need a financial professional. They can help you grasp some basics and the strategies that can help protect you from the seeming randomness of finances. Stop rolling the dice. Reach out to a professional today!

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¹ “What is the Memory Capacity of a Human Brain?,” Clinical Neurology Specialists, https://www.cnsnevada.com/what-is-the-memory-capacity-of-a-human-brain/

² “What is the Memory Capacity of a Human Brain?,” Clinical Neurology Specialists, https://www.cnsnevada.com/what-is-the-memory-capacity-of-a-human-brain/

³ “Computation Power: Human Brain vs Supercomputer,” Foglets, 10 Apr, 2019 https://foglets.com/supercomputer-vs-human-brain/#:~:text=The%20amount%20of%20energy%20required,charge%20a%20dim%20light%20bulb

⁴ “Why don’t we understand statistics? Fixed mindsets may be to blame,” ScienceDaily, Oct 12, 2018, https://www.sciencedaily.com/releases/2018/10/181012082713.htm

July 13, 2020

The Gambler’s Fallacy

The Gambler’s Fallacy

Humans are amazing.

We’ve sent people to the moon, we’ve constructed gravity-defying skyscrapers, and developed incredible medicines and machinery to make our lives better.

But there is something we’re generally not great at—understanding probability.

It’s a mental blind spot that many of us seem to have. Sure, we can learn math formulas that help us make predictions in the abstract, but most of us will fall prey to a common misjudgment called the Gambler’s Fallacy. Here’s how it works!

Consider a coin toss
You and some friends are incredibly bored one day and start tossing a coin to pass the time. Somehow you flip 5 heads in a row, so maybe you can make a little cash off this run! You wager $10 that the next coin toss will be tails. Afterall, isn’t there a huge chance that the next toss won’t be heads?

Wrong!

You flip the coin, slap it on your wrist, and see heads for the 6th time. Congratulations, you’ve fallen prey to the Gambler’s Fallacy. You assumed that because an event frequently happened in the past, it was less likely to occur going forward.

But the past doesn’t always predict the future
We love noticing patterns and seeing trends. They are mental shortcuts to understanding the world, and they help us predict future events so we can come up with a game plan. It seems intuitive that 5 coin flips for heads somehow means that getting tails is right around the corner! We expect a 50/50 overall outcome, so the coin must have exhausted its ability to land with heads up for a bit, right?

But that’s not how pure randomness works. Each coin flip is its own separate event. The past few tosses have nothing to do with how the next one will turn out. It’s always 50/50, no matter what has happened in the past!

The cost of the Gambler’s Fallacy The Gambler’s Fallacy might not seem like a big deal. But if you’re not careful, your assumptions about the future could lead to big mistakes in the present. The Gambler’s Fallacy is sometimes called the Monte Carlo Fallacy because of an incident at the Monte Carlo Casino in 1913. A ball fell on the black several times on a roulette table. Gamblers noticed the string of black and decided to start betting on red. Surely the streak couldn’t last much longer! But the run of black continued for 26 rounds. Millions of dollars were lost because people fell into the classic trap of the Gambler’s Fallacy.

It’s easy to trust your gut. Sometimes certain decisions just feel right! But traps like the Gambler’s Fallacy can crop up when we’re trying to plan our futures. How many people make wild emotional calls when they see the market going up or down? How many people assume they’ll never need financial protection because everything is fine right now? It’s always worth seeking professional guidance when you’re making an important call. They can help cut through the confusion and help you avoid pitfalls and mental blindspots!

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April 1, 2019

Phishing, Part 1

Phishing, Part 1

If you’ve ever peeked in your spam folder, you’ve probably noticed multiple emails from people claiming all sorts of nonsensical and unbelievable things.

It is not recommended that you open these emails, but be aware they most likely contain links that will claim to send you to a particular webpage but in fact will send you elsewhere.

This is an example of “phishing”, and thanks to advanced spam filtering today, you may never have to deal with these kinds of threats directly. But there are other kinds of phishing you should be aware of.

What is phishing?
Phishing is the act of looking for individuals who are willing to hand over their important personal information. One technique is to use a “shotgun approach”, where the phisher attempts to contact as many people as possible. General phishing like this relies on large numbers: Even if the probability that someone would actually give their information to a phisher is something like 0.001%, if the attack vector reaches 100,000 people – which isn’t unusual – there is that chance there will be at least one victim.

Phishing can also be targeted, in which the attacker directs the strike against a particular individual. This type of attack usually involves employees of an organization or high-ranking officials, as these targets are the most valuable. This kind of phishing often requires a degree of social engineering as well, wherein the phisher may appeal to various tactics to gain information. They may pose as coworkers or customers who have lost their passwords, for example, or they may try to subtly encourage the victim through conversation.

An example of conversational phishing may unfold as follows:

Through a seemingly normal conversation with a stranger, the attacker volunteers information about their own (fictitious) children, then asks the victim about their children. To follow social norms and reciprocate, the target may provide information like school holidays, partial names, or even birthdates. This may be inadvertent, like mentioning their child recently had a birthday party. School holidays can be cross-referenced against nearby school districts to potentially find the school the victim’s children attend. Once neighborhoods are determined, this could connect to full names or addresses of the victim. And since names and birthdates are still used by many people as passwords (not recommended), this could be a lead for the phisher. Armed with passwords, addresses, birthdates, and names, a lot of damage can potentially be done.

Phishing and hacking
Since high-value targets are more likely to be educated in internet security and less likely to fall for simple spam email attacks, phishers may use more subtle tactics. These kinds of attacks usually occur against people at work. A lot of IT security relies on trust, since employees need to be able to access the systems to do their work. If someone’s credentials are compromised, though, the person who has those credentials can potentially infiltrate the IT system. This is how a lot of “hacking” is perpetrated. Certainly there are plenty of attacks against software code, but if an insider can be compromised, it may be quicker, easier, and less detectable than finding a hole in the system’s security. So phishing is a prime tool for hackers, simply because humans are more easily hacked emotionally and psychologically than IT systems with established electronic security measures.

Most people should already be aware of shady tactics a phisher might use to gain access to sensitive information – but if these attacks didn’t work, no one would use them. So someone out there must be falling victim. Make sure it isn’t you.

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