What if I told you that I thought Bitcoin had an 85% chance of going to zero. And what if I also said that I was investing in Bitcoin.
In a similar vein, what if I told you I was bullish and yet short on the market.
Would you think I was crazy?
If so, then you’ve fallen for a trap that beguiles even the best investors.
The key is the difference between expectation vs probability.
To illustrate, let’s look at an example:
I profit on average even if a stock has a 75% chance of decreasing.
This thinking motivates my investments in startups and early-stage cryptocurrencies.
Bullish or bearish are terms used by people who do not engage in practicing uncertainty … Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration - Nassim Taleb
The outcome is not indicative of the quality of the decision.
If you make money it doesn’t mean you made a good decision.
If you lose money it doesn’t mean you made a bad decision.
This is a counterintuitive but fundamental idea.
Let me explain.
I like to think of it like Russian Roulette.
If you play Russian Roulette and win, did you make a good decision? What if you play again and win?
Playing Russian Roulette is a bad decision, even if the outcome is favourable.
Investing is the same. You might invest in a $200 stock to see it go up by $100.
Was it a good decision to invest?
Not necessarily. You might have just been on the lucky end of a bad decision.
For example, let’s say the:
But in actuality, the 5% chance of going up is what materialised. Here you make money off a bad decision.
It’s a bad decision because making the same decision multiple times would lose money.
In a single decision you can be lucky. But over infinitely many decisions, luck disappears and the odds weigh in.
So for any single decision, a good outcome does not mean that it was a good decision.
The Paradox of Expected Value is that it's hard to know whether a good outcome was merely just the lucky end of a bad decision. Only in the long term can we 'know'.