Posted on November 18, 2009 - by Aaron Lau

Psychology vs Probability

Photo by conorwithonen

When investing, ever wondered why most people take small profits instead of letting profits run and hold on to huge paper losses instead of taking a small loss early?

A lot has to do with the human psychology towards money. Our rational mind knows probability, but our sub conscious mind knows emotions like fear and greed. Which one prevails will determine your approach to investing and your overall success.

Which would you choose:
Option 1: A sure win $700 bet
Option 2: A bet for 75% chance for $1000 with a 25% chance of losing everything

If psychology of fear prevails, you will take the $700 bet because it means assured immediate profits in the pocket. However, the rational mind knows the probability of the expected outcome for option 2 is $750, a potentially better outcome.

Another choice:
Option 1: A sure lose $200 bet
Option 2: A bet for 75% chance to lose nothing with a 25% chance to lose $1000 Read more…

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