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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