Why do we tend to focus 🧘‍♂️ on the outcome rather than the process?

We don’t 🙅control the outcome.

Decisions are entirely a matter of weighing probabilities✖️➗➕➖🟰.

Let’s take an example from behavioral finance, - loss aversion📉🧑‍💻.

For good evolutionary 🌏reasons, humans' loss, averse when choosing between risky ⚠️outcomes.

More specifically, a loss ❌has two and a half times the impact of a gain of the same size. So, we like to be right ✅and often look for high-probability events.

A focus🧐on probabilities is fine when outcomes are symmetric but completely inappropriate when the payoffs are skewed.

(For starters, please refer to 1st👇comment)

Take the example of options:

Suppose 🤔that around 90% of options positions lose money💶. Does this mean that owing options is a bad idea?

Wait, the answer lies in how much money 💰you make on the 10% of options positions that a profitable.

For example, if you buy 10 options at Rs.1, each, and nine of them expired, worthless, but the 10th goes up to Rs.25, you will have a terrible probability of success, but a tidy 🤑profit.

Show some high probability propositions are unattractive, and some low probability propositions a very attractive on an expected value basis. say there is a 75% chance that a stock price 💵for perfection will hit its earning numbers so goes up 📈1%, but there’s a 25% chance that the company will mess with the forecast and go down by📉10%. the stock offers a high probability but on negative expected value.

Always remember that decisions are a matter of weighing probabilities, so be aware the next time you forecast top line in valuations. Don't follow my views, at least start doubting others.

#finance#money#decisionmaking#probability