Photo: Michael Parzchowski. Source: Unsplash
That’s how a lot of people approach gambling. For them, it’s entertainment. The risk associated with placing a bet and waiting for the outcome creates a certain exhilaration, independent of the outcome. It’s why slot machines and horse tracks are so popular, even people know that the odds are against them.
People don’t want to know the odds because that information detract from the excitement. It’s fun to dream of making that big score, and having someone chatter on about sequential probabilities can be a real buzz-kill. But when it comes to your core investments, it’s crucial to know about risk, uncertainty, and how to adapt.
There are a lot of times where we can’t calculate the odds, situations that are impossible to predict but have world-changing effects. Technological innovations – like the widespread adoption of personal computers in the ‘80s and ‘90s, or electrification in the ‘20s, or mobile computing today – can re-make society. In hindsight, these radical changes can be rationalized. But no one predicted them.
Risk, on the other hand, can be calculated – like rolling a pair of dice. Each set of numbers is distinct, and the probability or rolling one combination or another is determined by mathematical probabilities. I don’t’ know what the next roll will be, but can be pretty certain how many times 7 will come up in 1000 rolls – around 180. Go ahead and try it.
Photo: Jonathan Petersson. Source: Pixabay
Investors need to manage both risk and uncertainty. In the short run, business is risky. Sales may rise or fall, but usually fall within a range. The same holds for expenses and profits. But in the long run, life is uncertain. Technology or social changes or geopolitics can insert themselves anywhere. Sometimes managers just need to improvise and adapt.
Casual gamblers often don’t want to know the odds because they just want to have fun. But when it comes to your savings, the most comes from meeting your goals.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”