I was scanning the headlines and this little article on investment advice caught my eye. The writer uses a Lottery analogy to make a point.
Lottery promoters tilt
the scales by making the handful of winners available to our memory while
obscuring the many millions of losers. Then,
once we have settled on a belief, such as "I'm going to win the
lottery," we tend to look for evidence that confirms our belief rather
than evidence that might refute it. So we figure our favorite lottery number is
due for a win because it has not won in years. Or we try to divine—through
dreams, horoscopes, fortune cookies—the next winning numbers. But we neglect to
note evidence that hardly anybody ever wins the lottery, and that lottery
numbers can go for decades without winning. This is the work of the
"confirmation" error.
Lottery players who
overcome the confirmation error conclude that winning lottery numbers are
random. Investors who overcome the confirmation error conclude that winning
investments are almost as random. Don't chase last year's investment winners.
Your ability to predict next year's investment winner is no better than your ability
to predict next week's lottery winner.
It's a fine line for us. It's true that we promote the big winners even though the majority of players will not win large amounts. But there are big winners. The key is to play responsibly. One should not approach playing the Lottery as a path to wealth, but rather as entertainment.
Like I said, the article is really about investing. If you're curious, click here to read the whole thing.
