STREET DOGS

From What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan

Six psychological fallacies of risk:

The tendency to overvalue wagers involving a low probability of a high gain and to undervalue wagers involving a relatively high probability of low gain;

A tendency to interpret the probability of successive independent events as additive rather than multiplicative. In other words, people view the chance of throwing a given number on a die to be twice as large with two throws as it is with a single throw;

The belief that after a run of successes, a failure is mathematically inevitable, and vice versa — also known as the Monte Carlo fallacy. Someone can throw double sixes 10 times in a row and not violate any laws of probability because each of the throws is independent of all others;

The perception that the psychological probability of the occurrence of an event exceeds the mathematical probability if the event is favourable and vice versa. For example, the probability of buying the winning ticket in a lottery and being killed by lightning may be the same, but buying the winning lottery ticket is considered much more likely;

People’s tendency to overestimate the frequency of the occurrence of infrequent events and to underestimate that of comparatively frequent ones. Thus, they remember the “streaks” in a long series of wins and losses and tend to minimise the number of short-term runs; and

People’s tendency to confuse the occurrence of “unusual” events with the occurrence of low-probability events. So someone holding a number close to the winning number in a lottery is likely to be left feeling that they missed the win as a result of a terrible stroke of bad luck.