Confident Manics

The Psychology of Certainty & How to Really Win.

Two researchers created a game. Daniel Kahneman & Amos Tversky tested the game out on a BUNCH of people. The game is designed to test out how people act when faced with a set of gambles. There’s so much to learn from these two researchers.

The game has two versions which we’ll discuss in a moment, but first…

Here’s why it matters.

In both versions of the game, there is one option which appears “certain”. This is the option most of the people who were studied chose. And there is another option which appears uncertain. The option which appears “uncertain” is the objectively better option but was chosen the least.?

When investing, we try to pick the opportunity with the best odds & best outcomes. Yet, we often fail. Why?

Because we’re focusing on the appearance of certainty…the pseudo-certainty effect.

Let me show you; let’s play the first version of the game.

In the first game, there is only one round. You have to two options. Pick one:

1. a 25% chance to win $30
2. a 20% chance to win $45

Write down the option you picked.

In the second game, there are two rounds.

The first round, there is a 75% chance that the game will end & you will win nothing. And a 25% chance that you will move to the second round. Before the game begins, you need to decide which option you want in the second round.

In the second round, you have two options:

• 1 - a 100% chance to win $30
• 2 - an 80% chance to win $45

Write down the option you picked.

How do we know the “right” answer?

In both versions of the game, the first & second options have the same “expected returns”. Wisdom would say that, all things equal, we should take the gamble with better expected return.

• A 25% chance x a 100% chance =?a 25% chance. $30 x 0.25 = $7.50
• A 25% chance x an 80% chance =?a 20% chance. $45 x 0.20 = $9.00

This means that in any version of the game we should be picking the option that appears more uncertain but has the better expected return. The least chosen option.

In another life…

Being faced with uncertainty would lead us to first do math. But in this life, we start with emotions. Understanding how our minds work -chasing certainty, security, & safety- is the key to making decisions WITH certainty. Decisions that bring us security.