Humans are naturally challenged when it comes to distinguishing true randomness from external influences. You may believe you’re rational and well-versed in probability, but consider this scenario as a test of your objectivity: imagine strolling into a casino, confidently betting on black at the roulette table, and watching red appear nine times in a row. Would you stay calm, convinced it’s a statistical fluke? Or would you start looking for explanations beyond mere probability—perhaps suspecting a run of “bad luck” or even a rigged game?
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This dilemma speaks directly to the predicament investors and traders face every day. At its core, it’s about recognising whether an outcome is attributable to chance (pure statistical probability), luck (a metaphysical or external force), or conspiracy (a deliberate act of manipulation). Most improbable events can be ascribed to nothing more than chance; improbable does not mean impossible. But, since we know that conspiracies have existed—casinos have been caught rigging wheels, and markets have witnessed frauds—it’s never wise to dismiss rigging or foul play outright. Likewise, the human desire to see a guiding “force” at work can lead many to mislabel pure randomness as luck.
Where Biases Enter
The real challenge for investors is not only understanding that improbable streaks do occur but also recognising how fragile the human mind is when confronting them. Daniel Kahneman’s research has shown that our reasoning is riddled with biases, and Nassim Nicholas Taleb warns of being “fooled by randomness” when we construct neat narratives around random events. It’s all too easy to confuse a statistical anomaly with either metaphysical luck or hidden manipulation—particularly when the stakes are high.
Chance vs. Luck vs. Conspiracy: Be Mindful of the Disctinctions
Chance: Purely statistical probability that offers no deeper meaning or intent. Nine spins in favour of red may feel extraordinary, yet it remains firmly within the realm of probability.
Luck: Implies a guiding force or destiny. Many people default to talking about “luck” when they experience consistent wins (or losses), rather than accepting the chaos of chance.
Conspiracy: Posits deliberate manipulation. Though statistically less common, it happens—rigged wheels and fraudulent market schemes underscore the need for measured scepticism.
Australia: The “Lucky Country” That Loves a Punt
Australia is often referred to as the “lucky country,” a nod to its historical prosperity and spirit of opportunity. The nation’s competitive mentality is reflected in its vibrant sporting culture, where a fierce determination to win often goes hand in hand with a willingness to back one’s instincts. Australians are also renowned for their love of a punt—on horse races, footy matches, poker machines, you name it. This cultural proclivity for taking a gamble can blur the lines between chance, luck, and even conspiracy when outcomes defy our expectations. For traders and investors, these same dynamics can emerge in financial markets. The best defence is not to abandon the larrikin spirit but to remain conscious that improbable streaks and surprising results are often nothing more than the random nature of probability at work.
Cognitive Pitfalls that Cloud Judgement
To appreciate how easily we slide away from objective thinking, it’s important to recognise some well-known cognitive traps:
- Gambler’s Fallacy: After multiple spins land on red, people believe black must now be “due.” In reality, every spin is independent.
- Hot Hand Illusion: A fund manager on a winning run appears to have exceptional skill—until the sequence breaks. Random streaks happen in trading just as they do at the casino.
- Survivorship Bias: We highlight strategies and companies that flourished, ignoring the larger pool of those that failed following the same plan.
- Hindsight Bias: “I knew this crash was coming” is easy to say once the crash has happened—but was far from obvious before it did.
- Overconfidence: A rising market can make novices look like geniuses. Failure to recognise broader trends can lead to reckless decisions later.
Steps for Overcoming Biases and Embracing Objectivity
While there’s no magic formula for preventing human bias, you can adopt practices that keep your decisions anchored:
- Recognise the True Nature of Randomness: Streaks happen. If you spot a run of nine reds, treat it as a statistical quirk instead of a mystical sign.
- Stay Alert but Not Paranoid: Conspiracy is possible, but not probable in most cases. Gather data and investigate anomalies instead of leaping to conclusions.
- Challenge Your Own Explanations: Ask for concrete proof before chalking things up to “luck” or “rigging.” If the evidence is lacking, chance may be the most plausible answer.
- Seek Diverse Data Sources: Broaden your perspective by consulting multiple analysts and market voices. Minimising echo chambers dilutes the risk of bias.
- Maintain Records and Reflect: A trading journal helps you spot personal biases. Look back at decisions and outcomes to see where gambler’s fallacy, overconfidence, or other errors may have crept in.
- Embrace Probability Over Certainty: View markets through the lens of likelihoods, not absolutes. This shift in thinking helps keep emotional overreactions at bay.
- Educate Yourself Continuously: Staying informed about behavioural finance, probability theory, and past market anomalies offers a powerful antidote to knee-jerk reactions.
Whether at a roulette table in a bustling casino or managing trades on the ASX, improbable events will periodically arise. The key is to avoid rushing to label them as evidence of luck or sabotage when chance can provide a simpler explanation. By arming yourself with a realistic understanding of randomness and a healthy dose of scepticism, you can navigate financial markets (and the occasional casino wager) with greater clarity and composure.