If you roll a single fair die, what is the probability of rolling a 6? You count. There are 6 possible outcomes, a 1, 2, 3, 4, 5, or a 6. What’s the probability of a 6? 1 out of 6.
What if you rolled a 1, then a 2, then a 1, then a 2, then a 1, and then you rolled a 2. What’s the probability of rolling a 6?
Same thing…1 in 6. Is a 1 more likely?
Nope. Each roll is independent, and the sequence of 1,2,1,2,1,2 is just a coincidence.
Yet, from the time that we’re born, we’re trained to recognize patterns. It’s baked right into our brain. 3 million years of evolution. Consider how you learn language. Or recognize faces. Psychological studies confirm that babies as young as 3 months old start recognizing patterns. Humans are so trained to see patterns that we pick them up even in random series. Researchers once showed people completely random series of numbers, and people could pick out patterns.
This is one of the great issues when it comes to evaluating situations. One of my favorite anecdotes comes from an excellent book entitled “Fooled by Randomness”, and I suggest that analysts read it. It goes along the lines of: if there were a billion monkeys in a room on type writers, and one of them managed to type a best selling novel, would you buy that monkey for a million bucks? I hope you’d say no.
Sometimes monkeys are just lucky. Some people are like monkeys. Just lucky. Their performance has nothing to do with their actual skill.
The same goes for all sorts of phenomenon. An entire website might succeed for reasons that are totally independent of the factors within an entrepreneur’s control. Some body’s track record might not be indicative at all of some body’s real acuity.
But one thing is really certain: how people react when a long pattern is interrupted. In many ways, a track record of success that lasts a long period of time, when interrupted by a single failure, might just blow people away.
So we have broader issues that are hard boiled right into us when it comes to understanding probability and uncertainty more generally. We might understand, inherently, that every spin of a roulette wheel is independent of one another (what we call a stochastic series), but deep down inside, we see patterns. Some people have these enormously complex theories about how the numbers on that wheel appear, and in which sequence. And many more people are just totally shocked when something breaks a pattern. The more consistent a pattern, the more shocking it is.
One of the reasons for this, at least I believe, is because patterns, even in stochastic series, tend to reduce the perceived risk. After all, if a roulette table is going black red black red black red…then the risk of it going ‘green’ (0 or 00) is, perceptively, lower.
I’ve tried many times to communicate what a stochastic series means. The only method I really know of how to make pop is the monkey example….highlight a like coincidence and tie a proposition to it.