Five Out of Four People Are Fooled by Randomness

Introduction

If we believe the scientists, initially, there was a magical Big Bang giving birth to time and space. Millions and billions of years later, in an obscure part of the universe, a small mass called Earth with the perfect environment for the evolution of living organisms was formed. Then following the laws of nature, organisms from bacteria to humans evolved. Fighting, surviving, communicating, and innovating, humans dominated the Earth. With some luck, our ancestors found their partners and passed on their genes to the next generation. Somewhere along the way, your parents met and gave birth to you on that historic day. You have your own life trajectory, and finally, now you are here on this journey.

Now, what are the chances of you being here if we take into consideration the history of the universe? Would you be here if along the way there was even a small change in the path? You are a very lucky person. I wouldn’t bet on you being here, given the circumstances. But you did it, you lucky bastard. Now that you owe so much to randomness let's dissect probability a little further.

Our Debt to Gamblers

Life was simpler when humans attributed all the outcomes in their lives to God. Randomness and chance events were not even a concept. People thought that God created you, not all the chance events that were the precursor to your birth.

But that didn’t stop gamblers from trying to improve their odds in games of chance. Leonard Mlodinow, the writer of The Drunkard’s Walk: How Randomness Rules Our Lives, says that it is to them we owe a debt of understanding the topic of probability. While most of them believed that God would give them a good hand, others like Gerolamo Cardano started studying probability in the games of pure chance like dice. Cardano had developed a better understanding of the odds of winning in various situations than any of his opponents. The ‘Book on Games of Chance’ by Cardano is the first human quest to understand the nature of uncertainty. It introduces one fundamental concept of classical (or mathematical) probability: the Law of Sample Spaces.
Translated into modern terms, it reads: “Suppose a random process has many equally likely outcomes, some favorable (that is, winning), some unfavorable (losing). Then the probability of obtaining a favorable outcome is equal to the proportion of outcomes that are favorable. The set of all possible outcomes is called the sample space.”

We don’t get Probability

Suppose the contestant on a game show is given the choice of three doors. Behind one door is a car; behind the others, goats. Let’s make an assumption that most people would prefer a car over a goat. So, the contestant should try to pick the door which contains a car behind it. Initially, the contestant picks a door at random. After the contestant picks a door, the host, who knows what’s behind all the doors, opens one of the unpicked doors, which reveals a goat. Now that there are two closed doors and one open revealing the goat. He then says to the contestant, “Do you want to switch to the other door?” Is it to the contestant’s advantage to make the switch?

The problem is also called the Monty Hall problem. Marilyn vos Savant, who was listed as having the highest recorded IQ in the Guinness Book of Records from 1985 to 1989, when answered on her famous column that it is advantageous to make the switch, she united 92% of Americans (an impossible task) against her. Almost 1000 PhDs furiously wrote in, asking her to confess her mistake. What was she thinking? Two doors are available, your door and another unopened door. So, there should be a 50/50 chance, right?

So, let’s dissect this problem. Initially, you choose a random door. The next thing that happens is that the host uses his previous knowledge of where the car is and knowingly chooses the door with a goat behind it. Now, that is not a random process.
In the lucky scenario, which has a 1 in 3 chance of happening, your initial guess is correct. It is better not to switch.
But hear me out, in the unlucky scenario, which has a 2 in 3 chance of happening, your initial guess is incorrect. In that case, out of two unchosen doors, one contains the car. Then the host precisely opens the door containing the goat behind it, which means that the remaining one must contain the car. Now, if you switch, you win a car, and it’s a win for probability and logic.

If you are still confused, let’s say there are 100 doors. Behind one is a car. You choose a door initially. Then the host goes on opening all the remaining 98 doors which do not contain the car. Then what do you do? Do you switch?

We get probability and then misunderstand it

If we flip a coin 1000 times, on average, we would expect to get 500 heads because the probability of getting a head is 1/2. Now, if you got 50 heads in a row. What do you think is the chance that the next flip will result in heads? Most people are pretty confident that it will result in a tail because the tail has been long overdue. The mere fact that the coin has landed on heads for five or even fifty flips in a row does not mean tails is due. In the next flip, there is an equal chance of getting a head as there is of getting a tail.

You didn’t actually know it was going to happen

Our mind is not a sophisticated thinking-machine, but rather a patchwork of rules and shortcuts called heuristics. Unfortunately, the price we pay for using these lazy shortcuts is that our reasoning becomes irrational and marred by what psychologists call biases.

Randomness, chance, and luck influence our lives and our work more than we realize. Because of hindsight bias and survivorship bias, in particular, we tend to forget the many who fail, remember the few who succeed, and then create reasons and patterns for their success even though it was largely random. Marcus Tullius Cicero presented the following story.

Diagoras of Melos, a nonbeliever in gods, was shown a painting of some worshippers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drowning. Diagoras asked, “Where are the pictures of those who prayed, then drowned?”

The drowned worshippers, being dead, would have a lot of trouble advertising their experiences from the bottom of the sea. This can fool the casual observer into believing in miracles. We call this the problem of silent evidence or survivorship bias.

As Daniel Kahneman puts it in his book, hindsight bias has pernicious effects on decision-makers' evaluations. It leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad. The worse the consequence, the greater the hindsight bias. In case of a catastrophe, such as 9/11, the events leading up to the attack, when we look back at them, certainly seem to point in an obvious direction. On July 10, 2001, the CIA obtained information that al-Qaeda might be planning a major attack against the United States. George Tenet, the director of the CIA, brought the information to National Security Adviser Condoleezza Rice. When the facts later emerged, Ben Bradlee, the legendary executive editor of The Washington Post declared, “It seems to me elementary that if you've got the story that’s going to dominate history, you might as well go right to the president.” But on July 10, no one knew or could have known that this tidbit of intelligence would turn out to dominate history.

The human propensity to see patterns where there are none can get us into a great deal of trouble. Gambler’s ticks are manifestations of this effect, so for example, a trader who wins on a day when he or she wore glasses and a green shirt will probably start wearing the same outfit more, perhaps even unconsciously.

Don’t be a Turkey

“Black Swans” are the happenings that never seemed possible. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single black swan.

Let’s see an example from the book ‘Black Swan’ by Nicholas Nassim Taleb.

A Thanksgiving turkey might ‘randomly’ find itself under the blade on its 1000th day after being fed daily and allowed to roam free for the previous 999 days. But what in this case seems random to the turkey would not seem so random to the butcher who possessed this knowledge and had it penned in their calendar. Taleb puts it simply; don’t be a turkey.

We are inherently poor at understanding the impact of rare events. Even after multiple “completely unexpected” stock market crashes, somehow, many traders still believe the next crash will not happen or will be spotted by them in advance.

How to deal with randomness?

How did this bizarre layout of keys (known as QWERTY) become a universally accepted standard for typing?
Rather than being the optimal solution, it was, in fact, designed to avoid jamming old-fashioned typewriters. Yet since people are too lazy to switch to a different kind of keyboard, this suboptimal solution has prevailed. This is called a path-dependent outcome: if we were to start from scratch, we would not wind up with a QWERTY-keyboard again.

Our thinking is also path-dependent, meaning that our thinking and reaction depends on the path we took to reach the same destination. For instance, if you were to win $5 million today and lose $4 million tomorrow, you would likely be much less happy than if you simply won $1 million tomorrow, although the end result is identical. Path dependency also means we cling to our existing opinions. Scientists and politicians tend to get attached to the ideas they advocate and refuse to change their minds, even in the face of contradictory information.

Life is unfair and non-linear: The best do not always win. We can never be sure any theory is right — things constantly change, and the next observation may prove us wrong.

According to Taleb, all of us are sometimes the victims of adversity caused by harmful randomness (an unexpected cancer diagnosis is a prime example).In such an event, the code of conduct we should follow is provided by stoicism. It encourages us to follow a dignified path of personal elegance, never showing self-pity, never blaming others, and never complaining. However, randomness is not all that bad. One can gladly be fooled by randomness when it comes to art and poetry but be hyper-rational when dealing with science and finances.

Because chance plays an important factor in success, try to take as many chances, seize as many opportunities as you can. Even a coin weighted toward failure will sometimes land on success. Chance favors preparedness, but it is not caused by preparedness (same for hard work, skills, etc.). People misconstrue this message as the key to success is never preparedness, skills, and hard work but always luck. It’s more random than we think, not it is all random.