Nope. Those aren’t portfolio allocation numbers.
Those are statistical outcomes and how you perceive them matters a big deal. What are they, how can we give things proper attribution and save ourselves from unmet expectations? That’s what this post is about.
That’s the flip of a coin. Heads or tails. Quite random. Statistically stable. Even if you have had flipped 10 heads prior, the odds of heads or tails has not changed for your next flip. The probability of your next flip being heads or tails remains the same, 50%.
I am going to generalise somewhat now. Hypothesis testing perspective wise, this is a fair enough threshold to deem that there is an effect which one can conclude that the event outcome is not random (50-50% is random). You cannot nail it down to an exact science yet, where it is calibrated.
This is where there is highly likely a science to it. But here’s the tricky part too. Even if the factors have been aligned to produce that 90% statistical outcome stability, there is a 10% chance of a negative outcome. And should that negative outcome be followed with a negative marking, will you attribute that those factors are useless based on what is simply bad luck?
This is the exact science. The laws of gravity are an example. No random error. No deviation of outcomes should a set of factors be a given. Expectations have justifications in hard facts.
First and foremost, the assumption thus far, is that the statistics are stable.
One will be doing self a disservice by not adjusting expectations according to the statistics. Seeing 50 as 70 or 90 or even 100 (worst), is really ludicrous. Seeing 70 otherwise than what it is, displays a lack of grasp of probability and statistics.
The 90% mark is tricky to an extent when there is negative marking involved. Dissecting it further, assume that one is able to control all variable factors, there is still a 10% chance of a negative outcome. With the alignment of stars that produced this setup, will you pass up the chance to act based on 10% failure rate? How committed to this chance will you apply considering the negative marking effects?
Now that you have a better control over how to perceive odds, what if the statistics are not stable? Aha moment. Financial advisory will always be a craft, not an exact science. See things for what they are and you will never be oversold.
You know what I do. How can I help you perceive better?