The Flaw of Averages & The Consequences of Labeling

The?law of averages ?is a principle that supposes most future events are likely to balance any past deviation from a presumed average.

Take, for example, flipping a coin.? If you happen to get 5 "Heads" in a row, you'd most likely assume the next one should be "Tails" ... even though each flip has a 50/50 chance of landing on either.?

Even from this example, you can tell it's a flawed law.? While there are some reasonable mathematical uses of the law of averages, in everyday life, this "law" mostly represents wishful thinking.?

It's also one of the most common fallacies succumbed to by gamblers and traders.?

The concept of "Average" is more confusing and potentially damaging than you might suspect.

Perhaps you heard the story about how the U.S. Air Force discovered the 'flaw' of averages by creating cockpits based on complex mathematics surrounding the average height, width, arm length, etc., of over 4,000 pilots.? Despite engineering the cockpit to precise specifications, pilots crashed their planes on a too-regular basis.?

The reason?? With hindsight, they learned that very few of those 4,000 pilots were actually "average".? Ultimately, the Air Force re-engineered the cockpit and fixed the problem.?

It's a good reminder that 'facts' can lie, and assumptions and interpretations are dangerous.? It's why I prefer taking decisive action on something known, rather than taking tentative actions about something guessed.?

via?ReasonTV

Our Brains and the Illusion of Balance

Our brains are wired to find patterns, even in random events.? This tendency, known as apophenia , can lead us to see connections where none exist.

The Misleading Law of Averages

It's this very tendency that fuels the misconception of the law of averages.? We expect randomness to "even out" because we see patterns in short sequences.? This can be tempting to believe, especially when dealing with chance events.

The law of averages is a common idea that suggests future events will even out past results to reach some average outcome.? For instance, going back to our earlier coin-flipping example,? after getting five heads in a row, it's natural to assume the next flip is "due" to be tails.? However, that's not how probability works.? Each coin flip is an independent event (with a 50% chance of landing on heads or tails), regardless of previous flips.? The coin doesn't "remember" what happened before.

Apophenia isn't limited to coin flips.? For instance, you might see your lucky number appearing repeatedly throughout the day, leading you to believe it has a special meaning – even though each instance is completely independent.

This natural desire for order and predictability can lead us astray when dealing with chance events.

Why is it Flawed?

The law of averages often leads to a misconception called the gambler's fallacy .? This fallacy is the belief that random events can somehow "correct" themselves to reach an average.? In reality, every coin flip, roll of the dice, or spin of the roulette wheel is a fresh start with its own discrete probabilities.? The odds remain the same no matter how long the losing streak persists.

Are there ever times when it applies?

It's important to distinguish the law of averages from the law of large numbers , a well-established statistical principle.? The law of large numbers states that as the number of random events increases, the average outcome gets closer to the expected probability.? This applies in situations where many trials happen, and while past results of individual events are independent, the law describes the behavior of averages over a large number of trials.? For instance, the average weight of a large sample of apples will likely be close to the expected average weight of an apple, even if some individual apples are heavier or lighter than expected.

However, in everyday situations (with a limited number of events), the law of averages is generally not a helpful way to think about chance or probabilities.

Understanding these misconceptions can help us make better decisions and avoid false expectations based on flawed reasoning.

Improving Decision-Making in Gambling and Investing

Recognizing the fallacy of the law of averages can significantly enhance decision-making, particularly in gambling and investing.? Understanding that each event is independent can help participants make more rational choices.? Instead of chasing losses with the hope that a win is "due," savvy speculators understand their odds remain constant and may choose to walk away or set strict limits on their betting behavior.

In investing, this knowledge is equally crucial.? Many factors influence markets.? Nonetheless, believing that a stock "must" rebound after a series of declines too often leads to poor investment decisions.? Investors who grasp that past performance does not dictate future results are better equipped to evaluate investments based on fundamentals rather than emotions or flawed expectations.

By dispelling these misconceptions, you can approach gambling or investing with a clearer mindset, reducing the risk of substantial losses driven by erroneous beliefs about probability and chance.

You can also eliminate fear, greed, and discretionary mistakes by relying on algorithms to calculate realtime expectancy scores and take the road less stupid.? Take a different kind of chance.? Just ask our AI Overlords; they'll tell you what to expect!

Psychological Reasons Behind the Belief

Human decision-making suffers from a range of tendencies and biases.

Earlier, we discussed the tendency to find patterns, even where none exist.? Next, we will consider cognitive bias.? In our coin-flipping example, it is the representativeness heuristic that makes us assume that small samples should resemble the larger population they come from.

Emotional factors also play a role.? The desire for control in uncertain situations can make us latch onto the law of averages as a comforting notion.? Believing that things will "even out" gives us a sense of predictability and fairness in an otherwise random world.

Additionally, social influences can reinforce these beliefs.? Stories and anecdotes about streaks ending or luck changing often circulate among friends and family, further embedding the misconception into our collective consciousness.

Understanding these psychological reasons helps explain why the law of averages persists despite its flaws.? Recognizing these biases can empower us to think more critically about probability and chance events.

The Consequences of Labeling

“Words can be twisted into any shape. Promises can be made to lull the heart and seduce the soul. In the final analysis, words mean nothing. They are labels we give things in an effort to wrap our puny little brains around their underlying natures, when ninety-nine percent of the time the totality of the reality is an entirely different beast. The wisest man is the silent one. Examine his actions. Judge him by them.” ―?Karen Marie Moning

Continuing with the theme of cognitive biases, the upcoming election has me thinking about the consequences of labeling things, creating boxes, and simplifying ideas into news-ready headlines.

With more news sources than ever and less attention span, you see ideas packaged into attention-grabbing parts.? The focus isn't on education or the issues, but on getting the click, making your stay on their page longer, and sending you to a new article utterly unrelated to why you clicked on the page.

Complex issues are simplified – not even into their most basic forms – but instead into their most divisive forms ... because there's no money in the middle.

The amplified voices are those on the fringe of the average constituents' beliefs – precisely because those are the ones who are often the most outspoken.? We might think that because they're the voices we hear, these fringe messages fairly represent what people like us believe or think ... but they rarely do.?

Issues that should be bipartisan have been made "us" versus "them," "liberal" versus "conservative," or "right" versus "wrong." The algorithms many of our information sites use create echo chambers that increase radicalization and decrease comprehension.?

Identity politics have gotten so strong that you see families breaking apart and friend groups disintegrating ... because people can't imagine sharing a room with someone with whom they don't share the same values.?

In psychology,?heuristics are mental models that help you make decisions easier.? They're a starting point to save mental bandwidth, allowing you to spend more brain cycles on the important stuff.

That's a great use of "boxes" and "simplification"…?but it shouldn't eliminate deeper and more nuanced thought on important issues.?

Most situations are nuanced, and the "correct" answer changes as you change your vantage point.

In an ideal world, we'd consider every angle.? I recognize that's not realistic.

Instead, I encourage you to remember to continue to think and learn ... even about things you?already know.? And, if you become familiar with the most common cognitive biases, you can hopefully identify them in your thinking and decision-making.

Confirmation Bias is one of the more common forms of?cognitive bias.? Here is an infographic that lists 50 common cognitive biases .? Click to explore further . (LinkedIn won't let me embed a link into the image, so just click this link to see the full image)

via VisualCapitalist

Important issues deserve more research.? New insights happen between the boundaries of what we know and don't.? Knowledge comes from truly understanding the border between what you are certain and uncertain about.?

I challenge you to look beyond the headlines, slogans, and talking points you like most.? Look for dissenting opinions and understand what's driving their dissent.? Are they really blind or dumb (or are their value systems just weighted differently)?

Not everything needs to be boxed.? Not everything needs to be simple.? You should explore things and people outside of your comfort zone and look to see things from their point of view ... not your own.?

Recently, I've started using a website and news app called Ground News .? They claim to be a news platform that makes it easy to compare news sources, read between the lines of media bias, and break free from algorithms.?

As discussed above, online news and ad-driven algorithms have made it profitable for news outlets to embrace a position on the bias spectrum to target specific consumers.? ?That bias in the media affects everything from what events receive coverage to how a news outlet frames those events in their reporting.

As media outlets narrow their perspective and range of coverage, I use Ground to help me get a well-rounded view of important issues and become aware of my blind spots.

Applying This Lesson??

“I am ashamed to think how easily we capitulate to badges and names, to large societies and dead institutions.” ―?Ralph Waldo Emerson,?Self-Reliance

I love learning a lesson in one space and applying it to other spaces.? It's one of the cool things about AI.? An algorithm can learn rules in the construction space that may help in the medicine or trading space.? Everything's a lesson if you let it be.

In that vein, the lesson on labeling also applies to yourself and your business.? Don't get me wrong - naming things is powerful.? It can help make the intangible tangible.? However, don't let the label (or your perception of the label) stop you from achieving something greater.?

Many things are true because we believe them to be, but when we let go of past beliefs, the impossible becomes possible, and the invisible becomes visible. ?

Hope that helps.?

To read more, you can find my blog here or follow me on Twitter here .

Sign up for my Weekly Newsletters here .