Money Psychology 13: Room for error
Some of the best examples of smart financial behavior can be found in the Las Vegas casinos.
A tiny group of blackjack players who practice card counting know something which many don’t: the importance of room for error.
No one can know with certainty what card the dealer will draw next. But by tracking what cards have already been dealt you can calculate what cards remain in the deck. Doing so can tell you the odds of a particular card being drawn by the dealer.
In investing, similarly, forecasting with precision is hard. Uncertainty, randomness and chance are the unknowns which are ever-present part of your life. The best we can do is think about odds.
The most important part of every plan is planning on your plan not going according to your plan.
If the cost of the downside – even if the odds are only 5% – is a complete disaster, the other 95% isn’t worth the risk; no matter how appealing it looks. Things happen.
But the room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favour.
[The Psychology of Money: Lessons 13 of 18]
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