Odds are for the future: a brief chat about statistics

 

     Something happens. Something unexpected. A person near you says "what are the odds of that happening?" Well, since it has already occurred, the answer is 100%. Without a parallel universe, the chances of it NOT occurring no longer exists.

     In statistics, this situation is expanded by the concept that the past has no bearing on the future. If the odds of something occurring are 5 to 1, then after the event has occurred in the past then the NEXT odds of something occurring are still 5 to 1.

     Every time you flip a coin (with a fair, properly balanced, coin) the odds are 50% heads 50% tails (yes, with that very small possibility of landing on edge left out). If you toss a coin and get heads seven times in a row then the next time you toss it the odds are still 50% heads/50% tails.

     Now, if you anticipate the future, you can determine the odds of getting heads seven times in a row (1/2 * 1/2 * 1/2 * 1/2* 1/2 * 1/2 * 1/2 == 1/256) for the future. But every time you flip the coin, the odds for that flip remain the same.

     The phenomenon of people expecting the past to affect the future exists in many people -- good luck/bad luck. It exists in all addicted gamblers (the scientific gamblers are a different matter). That lucky streak just HAS to affect the future. (It doesn't.) I had an uncle who won the state numbers lottery (not a huge amount at that time -- but significant) and he put the money all back into the lottery system until he no longer had any net winnings.

     There are situations where the odds do change with time. This is true for actuarial tables. Your odds for living to a certain age changes with each year you live. If you live until you are 75, your odds of living until 85 (10 more years) are better than the odds of you living until 85 from the age of 55 (30 more years). But, be assured, the insurance company has it well planned out such that, on average, they are not going to lose money. Those tables require ignorance of the future to follow the actuarial odds. Robert A. Heinlein's story "Life-line" indicates a way to beat the system -- but it may be the only one.

     There are also situations where the perceived odds -- what we think exists -- are not the same as the statistical odds. Professional gamblers are aware of these situations and, by gambling calmly and without emotion, succeed in taking advantage of them -- over the long run. This also happens in other areas of investment and helps certain investors increase their likelihood of beneficial returns.

     All venture capital firms rely upon both experienced analysis and spreading their risks. Five investments of 10K still gives a good profit if two are totally lost, two give back 15K each, and one brings back 30K.

     "May the odds be ever in your favor."

Gambling: a matter of risk versus reward

    When you hear the word "gambling" you start thinking about casinos, and roulette wheels or maybe hands of poker. But, in real life, gambling is a matter of risk and reward. Crossing the street involves risk and the reward is getting to your destination across the street. Asking someone out for a date involves risk (emotional and, occasionally, physical) in the hopes of rewards of reciprocity of affection or friendship.
    However, gambling still is usually classified internally depending on whether one considers the risk to be voluntary or involuntary -- and reasonable depending on whether the chance of reward is sufficient to justify the amount of risk. If we think it is a high risk and does not require to be done then, and only then, do we usually call it gambling. So, games of chance are considered to be gambling but crossing the street is not.
    This isn't true of everyone. Jack Nicholson, in "As Good As It Gets", portrays someone who is all-too-aware of the everyday risks of life. He continually strives to eliminate risk by isolating himself and entering into rigid routines and being hyper-careful of hygiene and exposure. The rewards of everyday life are not enough for him to take these risks. He is "fortunate" to be able to cater to these attempted avoidances of risk because he has a lucrative occupation that allows him to do this. It is only when he sees a reward that is large enough that he increases his willingness to take more risk.
    Nicholson' s character is seen as abnormal because his awareness of risks is much greater than his recognition of potential rewards. The risks exist -- but so do the rewards that he cannot grasp. There is not a single, appropriate, balance even though there are certainly, within a given society, an expectation of being able to make "reasonable" judgements on such.
    For someone living in a war zone, the risks of doing anything rise and the potential rewards narrow. For someone with a dependable environment and financial basis, the risks seem smaller because the downside of failure is much less even if they don't achieve the hoped-for rewards.
    There are various phobias -- more specialized than those that Nicholson's character revealed -- that are still an out-of-balance reflection of the risk versus the reward. To Chicken Little, the sky may fall upon him if he goes out -- or to the agoraphobic. One person may be willing to work in high construction, balancing themselves on girders while another person may have difficulty getting onto a balcony.
    Life is a gamble. Being able to weigh the risks and rewards are more computable with games of chance than they are within everyday activities. But the risks must be taken to get to the rewards. It is part of life's journey to learn to make those decisions based on known risks and benefits.
    What risks do you see that outweigh the possible benefits?