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100% certainty gets people into trouble
A person who feels completely sure bets as if the outcome were certain. If the real odds were 80/20 and the 20 comes up, the loss is large because the bet assumed certainty. An investment gets made because the investor believes in it, and the job is still to see the other side and know what is being done.
Sentences that begin with an admission that you could be wrong, or that you don't know, have never gotten anybody into trouble. The sentences that do are the ones that begin with being 100% convinced.
Mark Twain's version is that trouble comes less from what you don't know than from what you know for certain that just isn't true.
Why are confident people so often wrong?
Psychologists have tested this by asking people for ranges they are 98 percent sure contain the true answer. In studies by Marc Alpert and Howard Raiffa in the late 1960s, the true answer fell outside those ranges around 40 percent of the time. Later researchers found similar results in many groups, including experts in their own fields. The pattern is called overconfidence.
How does overestimating odds hurt a bet?
Mathematician John Kelly, working at Bell Labs in 1956, derived a formula for the bet size that grows money fastest over many repeated bets. The formula depends on the odds of winning. If a bettor overestimates those odds, the size the formula returns comes out too large. Betting more than twice the Kelly amount produces negative long-run growth, even when the bettor has a real edge.
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