Psychology – Assessing profit and loss realistically

People think of themselves as highly rational. That they act logically and rationally in life. But this is a fallacy. We present some case studies that you can use to learn how to better assess opportunities and risks in the future.

Sweepstakes and betting

It is one of the big dreams of our fellow citizens to win the lottery or to hit the jackpot in a competition. Such things are possible, but it makes sense to be realistic about the chances. Spending money on the lottery is pointless. The odds are so low that it is always a wonder why millions of people participate every week. The odds are about 1 in 8 million.

It is much better to bet on lotteries in newspapers or on the web. You can win much less there, but the expected value is completely different. In some cases, it is far superior to the lottery.

Our tip: Take a look at the expected value of a lottery. This is usually given by the organiser due to legal requirements. Multiply this number by the possible winning amount. Use this result to decide where it is worth playing.

Dangers

If you tell someone that he or she has a 90% chance of surviving an operation, most people say: OK, I’ll do it. If you rephrase it and say that 10% will not survive a treatment, then far fewer people will undergo surgery.

Our tip: Always calculate with the probabilities and leave out all other factors.

In the September 11, 2001 attack, about 3,000 people died directly at the accident sites. As a result, an immense number of US citizens began to drive and avoid air travel. As a result, the number of accident fatalities increased to such an extent that, in total, as many people died as on the day of the attack.

Our tip: The human brain is disproportionately afraid of events in which many come to harm at once. They are afraid of terrorists, but smoke, drink and eat far too much. They speed in cars and ride bicycles without helmets. These things are much more dangerous.

Stock market and investment

Let’s say there is a game. You can win 10,000 euros and lose 500 euros. The chances of winning are 50% or even 60%. Then there will be people who miss this chance. Why? People have an exaggerated fear of losing something. They turn their backs on opportunities to make a profit.

Research shows that shares generate attractive returns in the long run. Nevertheless, most people prefer to buy inferior investment products where they are fobbed off with a minimum interest rate. This is low, but guaranteed. Losses can be made on the stock market, the thought is unbearable to them.

Our tip: ETFs and good funds offer much better chances of wealth in retirement than life insurance or other savings contracts. If you have long enough, the money can achieve much more for you there than in other ways.