Sharon Jean and Michael Beem both bought lottery tickets in the same lottery at the 7-Eleven on Hartzel Rd. in Merritton, Ont. Both won a major prize. Does that mean that people should buy tickets at this store in future? Maybe if you believe in lucky stores.
Is the lucky store idea rational?
I know people who do not believe in luck. They are the more rational. My view is that luck is the only reasonable way to explain the success of people with whom I disagree. I accept as possible that that view is too narrow.
Superstition, like the lucky store idea, is common because humans do not understand probabilities. They need the simplifying assumption.
If the probability of a thing happening is one in a million, it would seem to be rare. But what if the appropriate circumstances arise 500,000 time a day? The probability of going three consecutive days with no occurrence is less than one chance in four. The one in a million would then seem commonplace. If the situation comes up once a year, the probability of one occurring in your lifetime is nearly zero. Same probability yet a different observation.
All probabilities are calculated in terms of the chance of a single event happening, but to understand that in real terms you must understand how many chances there are. How big is the population of events. If you are bitten by some randomly encountered dog, it will most likely be a Labrador Retriever. Not because they are likely to bite but because the chance of encountering a Lab is greater.
In the same way, if an occurrence arises that should be highly improbable and it occurs frequently, you should check the way the population is constructed and the assumptions that have been made about its distribution. The odds of seeing 20 consecutive heads while tossing a fair coin is less than one in a million. If you have observed that happen, as opposed to assuming the odds are 50-50 on the next toss, you should examine the coin .
The stock market has a six sigma daily event regularly. (about 1 in a million probability.) That does not mean a lucky chance, it means the way they calculate the statistics are too limited. You should notice that before you start paying much attention to all of the statistical measures you can find about the stock market.
Try common sense. That is a meaningful issue in financial literacy. If something is so improbable that it should not happen, after seeing it, you will usually be right to assume there are possible events that are not considered in the theory.
Or, you could superstitiously continue to believe in the regular occurrence of improbable events. But, I must warn you, “It is bad luck to be superstitious.” Especially in financial matters.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.