In most games of chance, the odds are easily figured out. You can calculate the odds in advance for coin flips, dice throws (craps, backgammon), or a spin of the roulette wheel because each has a fixed set of outcomes.

Now take a game like the stock market. Calculating odds gets trickier because it adds complexity and uncertainty. The outcomes are no longer fixed and the number of variables to consider grows exponentially.

Unfortunately, human nature makes this worse. It turns out, we’re terrible at estimating probabilities. Our biases get in the way.

Our troubles begin with availability. A simple rule of thumb tells us to put higher odds on something that happens more often. Unless we have trouble remembering how often that something really happens.

The availability bias screws with how we estimate probabilities. When we weigh the probability of an event happening, our estimate is based on how easily we remember a similar event and how often we remember it happening. Unfortunately, how easily we recall something has more to do with recency, vividness, and personal involvement. Continue Reading…

I have nothing against a stock split. I did two in the Sixties, but this is really a non-event… It’s really paper shuffling. — Henry Singleton, CEO Teledyne

Mathematically, nothing changes with a stock split. The number of outstanding shares increase in proportion to the split, but the share price decreases in an inverse proportion.

In other words, a 2-for-1 stock split doubles the share count but halves the stock price. The market cap stays the same. So if the company was “expensive” before the split, it’s still expensive afterward. Thus, the paper shuffling.

And yet, companies still do it because they believe there’s a benefit. But why?

The latest announcement by Apple might shed some light. Its press release claims a stock split will “make the stock more accessible to a broader base of investors.”

That appears to be a popular answer. Similar responses have been used throughout history. Continue Reading…

The 1893 World’s Columbian Exposition in Chicago needed a centerpiece attraction. It had to be novel, different. Daniel Burnham wanted something to rival Gustave Eiffel’s tower built for the 1889 Exposition in Paris.

Proposals came in from everywhere. Everyone had the same mindset — a bigger tower. A log tower 500 feet taller than Eiffel’s, a telescoping tower, and an 8,947-foot tower with an elevator to the top and toboggans to get down were proposed. Even Eiffel submitted a larger version of his tower for the fair. It was denied.

Burnham wanted something unique. So he challenged American engineers to come up with something spectacular.

George Washington Gale Ferris Jr. accepted the challenge. The idea came to him in a momentary flash. He envisioned a giant steel “bicycle” wheel, 250 feet in diameter carrying 36 cars that could hold 60 people each. A complete revolution of his wheel would propel 2,160 people around in 20 minutes. Continue Reading…

Did you expect a market crash in 2020?

How bad did you think the market crash would be?

How quickly did you think the market would recover?

Are you sure that’s what you thought?

Our minds play tricks on us. The worst part is knowing about it doesn’t help. Hindsight bias is one such trick that messes with our memories in a couple of different ways.

• We tend to look back on our past predictions as being more accurate than they were.
• We tend to look back on events as being more foreseeable than they were at the time.

Richards Heuer, in Psychology of Intelligence Analysis, related a couple of examples. Continue Reading…

John Henry Patterson took a company that three previous owners failed to make profitable, built it into a global success, and changed how businesses worked. He did it selling cash registers.

There was just one problem. Nobody had a clue why they needed a cash register.

The cash register was invented in 1879 by a man named James Ritty. Ritty tried to make it into a business but failed. So he sold to another guy. He failed too and sold it to a local group of investors, who also failed.

When Patterson bought the company in 1884, not much had changed in those five years. Other than a few sales to saloon and store owners, most people were skeptical of the machines. In fact, local business owners mocked Patterson for buying a horrible company that had no demand for its product.

So Patterson set out to create demand. Continue Reading…