Memo #9: May the odds be ever in your favour
How our psychology doesn't help investing
Yale has an incredible series of lectures on YouTube for free — one of my favourites is the eminent philosopher Shelly Kagan’s course on death1 (Kagan resembles an ageing hippie or former Apple engineer, who sits on the table cross with his legs crossed in a flannel shirt). Death might be a strange way to start a memo but it’s really got to do with odds — Kagan notes that all humans think in odds (i.e. gambling, betting) whether it is the decision to cross the road, attend a fourth birthday party or buy an equity.
It’s here I want to start this — we are all playing odds every day, and therein lies the problem. Daniel Kahneman calls it prospect theory — we’re much more likely to try and avoid loss than to make gains. It's pronounced — the risk of actual loss creates 2-5x more the pain than the prospect of a gain!
See the chart below:
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