Dumb Luck: Rethinking Your Feelings

Trust your gut, is a popular philosophy lately. Your gut knows what to do and is never wrong. When you think back to when you didn’t follow your gut and you had a bad outcome, you know I am right to say trust your gut.

Or am I?

Is your gut potentially a terrible decision-maker? Are you cherry-picking moments when your gut was right and ignoring all the times when it was wrong?

Lady Luck

1913, you walk into the Monte Carlo casino and people are very excited. You look over at the roulette wheel, it has been black five times in a row.

It must go red, surely. Would you bet some money on red?

The bewildered crowd can’t believe it, it has now gone black 10 times in a row.

Would you bet some money now on red? It has to go red now right?

People are betting crazy money. How much would you put on red? It is basically guaranteed, right?

The whole casino feels it has to go red next. It can’t possibly not go red.

It lands on black 25 times in a row. Do you bet the house now?

Finally, after 26 spins in a row, it lands on black. 

The people in the room lost their minds. They couldn’t believe it. The trouble is they didn’t understand it. 

Sweet Sweet Fallacies

The thing that wasn’t understood by the punters in the casino is that the previous spin of the roulette wheel has no effect on the current spin. 

It is known as the Gambler’s Fallacy, or not shocking to any of you lovely readers, the Monte Carlo Fallacy.

It states that incorrectly assuming that an event is more or less likely given the events that have happened previously.

Part of the issue is that people have difficulty understanding the difference between large and small sample sizes. Over time the roulette wheel will converge to close to 50% black and red, but in the short term, it can do any number of wild variations. 

We fall into the Gambler’s Fallacy when we don’t understand the difference. 

It is correct to assume that getting black on 26 spins of the roulette wheel in a row would be astronomical. However, betting on whether the next spin is going to be red or black is 50/50. It feels like that previous spin should affect the next one but our desire for it to be true doesn’t actually make it true. 

I Think Therefore I Decide

The Gambler’s Fallacy shows us that our gut isn’t always right and it is a terrible judge of statistics.

My gut tells me to sleep in and eat lots of sugary treats. This sounds amazing but long term is a terrible decision.

When making decisions with your team you have to understand the difference between the actual relationship between events and our desire to tell a story that feels good to us.

The first part of that is holding ourselves accountable. It never feels right that we are the problem but just because it feels bad doesn’t mean it is wrong.

Be careful that the events are actually connected and related and that you aren’t screwing up the maths.