Mental Model: Misconceptions of Chance
Farnam Street stashed this in Interesting
We expect the immediate outcome of events to represent the broader outcomes expected from a large number of trials. We believe that chance events will immediately self-correct and that small sample sizes are representative of the populations from which they are drawn. All of these beliefs lead us astray.
This is so well said: We underestimate the role of luck in life in general.
Our understanding of the world around us is imperfect and when dealing with chance our brains tend to come up with ways to cope with the unpredictable nature of our world.
“We tend,” writes Peter Bevelin in Seeking Wisdom, “to believe that the probability of an independent event is lowered when it has happened recently or that the probability is increased when it hasn’t happened recently.”
In short, we believe an outcome is due and that chance will self-correct.
The problem with this view is that nature doesn’t have a sense of fairness or memory. We only fool ourselves when we mistakenly believe that independent events offer influence or meaningful predictive power over future events.
Furthermore we also mistakenly believe that we can control chance events. This applies to risky or uncertain events.
Chance events coupled with positive reinforcement or negative reinforcement can be a dangerous thing. Sometimes we become optimistic and think our luck will change and sometimes we become overly pessimistic or risk-averse.
How do you know if you’re dealing with chance? A good heuristic is to ask yourself if you can lose on purpose. If you can’t you’re likely far into the chance side of the skill vs. luck continuum. No matter how hard you practice, the probability of chance events won’t change.
“We tend,” writes Nassim Taleb in The Black Swan, “to underestimate the role of luck in life in general (and) overestimate it in games of chance.”