During the German air raids on Moscow during World War II, a distinguished Russian professor of statistics made a late-night trip to his assigned air-raid shelter.
The locals were surprised to see him there because the professor had never sought shelter before. Being a man of probabilities he knew there were 7 million people in Moscow so he proudly boasted that the odds of getting hit were slim.
His friends asked why he finally changed his mind. He explained, “Look, there are 7 million people in Moscow and one elephant. Last night they got the elephant.”
Risk doesn’t mean much to people until there are consequences attached.
Michael Lewis introduced baseball fans to analytics in Moneyball in 2003. The sport hasn’t been the same since. He introduced basketball fans to analytics six years later with a New York Times profile on defensive genius Shane Battier:
Like professional card counters, the modern thinkers want to play the odds as efficiently as they can; but of course to play the odds efficiently they must first know the odds. Hence the new statistics, and the quest to acquire new data, and the intense interest in measuring the impact of every little thing a player does on his team’s chances of winning. In its spirit of inquiry, this subculture inside professional basketball is no different from the subculture inside baseball or football or darts. The difference in basketball is that it happens to be the sport that is most like life.
Battier is now retired as a player but serves a role with the analytics department of the Miami Heat. The fact that there is such a thing as an analytics department in the NBA shows how far things have come.
In a recent profile at The Undefeated, Battier juxtaposed basketball with blackjack:
If you’re playing blackjack, there are certain hard and fast rules. You always double down on 11, no matter what. You always split aces. And you always hold on 17. Are you guaranteed 100% to win those hands if you do those things? No, but mathematically it’s proven that if you do that over a long period of time, your chances of success are greater than if you go against what you should do in those situations. For basketball, it’s the same. There is not a right or wrong answer in basketball, but there are certain more right answers and certain more wronger answers.
Battier was known as one of the few defenders in the league who could slow down Kobe Bryant to some degree when Kobe was in his prime:
Kobe, may he rest in peace, I knew when Kobe Bryant went to his right hand and shot a shot in the paint — and you factor in makes, misses, fouls drawn, free throws off those fouls, passes to teammates, their shots off those passes — it was a 62% shot. So every time he did that shot, it was worth 1.26 points. And when I went to his left hand and I kept him out of the paint — factoring makes, misses, fouls draw, free throws, passes, turnovers — it was only a 43% shot. So every time you went left and did that shot, it was worth 0.84 points. Now you don’t have to be a math major to know that guarding Kobe Bryant, you don’t want him to do the 62% thing. You want him to do the 43% thing.
The problem with most decisions in life is there are no cards to turn over or game stats to use when making decisions under a cloud of relentless uncertainty. This is what makes rational decision-making such a difficult endeavor. You want the odds in your favor but the majority of the time you don’t know exactly what those odds are.
In 1921, John Maynard Keynes wrote a book called A Treatise on Probability. Keynes made the point that it was wrong to assume you could make a calculated mathematical expectation for every decision in life. At a certain point, you have to take a risk and move forward with the information at hand, even if it’s incomplete. Intuition and judgment are necessary evils in an incalculable world.
Zach Carter further explains Keynes’s reasoning on this topic in The Price of Peace:
To say that some state of affairs is probable, according to Keynes, is not to simply state that mathematically, it will occur a certain percentage of times in a simulation. Mathematical data might be useful in a person’s assessment of probability, but it cannot be probability.
In Keynes’ thinking, an event could be objectively probable in 1920, even if, looking back from 1922, it never actually came to pass. And it is the objective probability — not the subsequent course of events — that matters for human reason. There is a difference between being rational and being right.
Keynes’s personal philosophy centered around the idea that it was better to pursue high probability events that would lead to better than average outcomes rather than striving for some utopian situation with a low probability of ever coming to fruition.
The problem with making decisions, financial or otherwise, comes down to the fact that the past provides an incomplete guide because the future is always and forever unknowable. Pete Bernstein calls this the double meaning of probability.
Bernstein wrote in Against the Gods, “Probability has always carried this double meaning, one looking into the future, the other interpreting the past, one concerned with our opinions, the other concerned with what we actually know.”
There are no specific probabilities for the prospect of a pandemic or war or interest rates in 10 years or how people will price stocks in 20 years. No one knows but that’s the point.
You can’t ignore uncertainty. You have to embrace it and build it into any model you may have about the future by giving yourself some margin for error.
Every decision should come with a disclaimer that no one can possibly be right all the time. Once you realize this it’s actually freeing because it allows you to plan for a wider variety of outcomes.
Far too often people judge decisions exclusively on the outcome, not the process that went into the decision in the first place. Even when you put the odds in your favor, you’re not always going to like the outcome.
Lewis described how Battier approached the inherent uncertainty of basketball by disregarding individual outcomes:
Knowing the odds, Battier can pursue an inherently uncertain strategy with total certainty. He can devote himself to a process and disregard the outcome of any given encounter. This is critical because in basketball, as in everything else, luck plays a role, and Battier cannot afford to let it distract him.
In short, think process over outcomes.
Would Keynes Have Been Fired as a Money Manager Today?