The hindsight bias mistake that ends in more losses over time
August 21, 2021
In this episode, we talk about the possible outcomes a piece of advice can have even as it has a positive expected value.
In previous episodes that talked about the concept of expected value. So when you're making a decision, whatever decision you make, there is a probability of success and a probability of failure. And if you calculate what both of those probabilities are, you can figure out what the expected value or the expected outcome of a situation is. So today we're actually gonna talk about what happens when you are given a piece of advice and the piece of advice, it has a positive expected value. And based off of that advice, you actually lost money.
So I'm going to share a story on some advice that I've given in the past which has had a positive expected value. So when I say a positive expected value, this is like the strategy that you should use every single time because mathematically it's gonna work out, right? So if you think about it in terms of playing blackjack or in terms of playing poker. For blackjack, if you just follow basic strategy then that's gonna have the best outcome for your game. Right? Same with poker. With poker, when you're playing against other people, and you're evaluating different hands, there's gonna be, sometimes you're gonna lose some hands, you're gonna win some hands. But if you play the right strategy, the whole goal is to win more than you lose.
So with this piece of advice that I've given them the past, here's a piece, piece of advice that I gave: my advice was prices for real estate in Houston, Texas was way too high. It didn't make sense. When I evaluated what rental prices were compared to what mortgage prices were, it just seemed like renting a property was a no-brainer. There were a lot of different players, international players, so people from Mexico, China, all pretty much wanting to move their money into the US and they're buying properties, and what they're doing is they're buying properties in cash or overbidding. And for a long time you've seen this like huge boom in Houston.
And to me, my thinking is it's not sustainable because the property values are so high and the rental incomes that these properties make, it doesn't make any sense. And when I talked to a lot of different property owners, especially amateur property owners, amateur landlords, they will hope for a positive outcome in terms of appreciation for the property, and to get that appreciation, they're actually willing to take a loss in cash flow. But if you've ever actually studied like the science behind real estate investing, then it's really all about the cash flow because you can't bank on the appreciation, you can have some kind of expectation for appreciation, but a lot can happen, a lot can go on that will change the entire game.
So if you would have taken my advice back in the day and did not buy property, well then now fast forward into the future what you might be, like I would say wondering, you would probably be a little upset with me because Houston real estate prices have jumped up by a lot, like a lot, a lot. Um, so you probably would have lost in terms of opportunity cost 25% of whatever you wanted to invest. So if you were going to invest $1 million, you probably lost like $250,000 taking my advice, right? And then someone can take this example and say "Hey if I would have taken Robin's advice, I would have lost this entire amount of money basically, you know because I didn't take Robin's advice and I made this money. Don't listen to Robin." That could be something that someone might say.
But the thing is if you're smart and savvy then you know that when you are calculating expected values, yeah, you're gonna lose some and you're gonna win some. But what you want to do is you want to be playing the basic strategy, the one that makes the most sense. So no matter what type of futures you can come across, then you will end up winning. And when I say what type of future is like you're going to have different types of futures that will basically determine whether your hand is a winning hand or a losing hand.
So for Houston property owners, it's a winning hand because of things that are happening outside of Houston. California property values have been going up sky high. California has really high taxes. A lot of people are upset with the California government. So there's been this mass exodus of people leaving California and even New York and going to Texas. Texas doesn't have any state taxes. There's like a lot of benefits from living in Texas. And so you've seen this like max exodus. So if you bought property or if you've had property in Austin or Houston, then you're doing well because all these people from California coming in with the California money and driving up property values.
But the thing is there was no way for you to know what was going to happen if you would have taken my advice 10 years ago. So the sound advice would have been not to buy the property. But even if you would have taken my advice, you would have lost money. But where you would have to be certain at least in terms of your decision making skills, is that what if you if you were to live out a million different futures, would your decision actually bear fruit? Right?
So there could have been a million different futures. Maybe California said, you know what, we're going to get rid of taxes and now all of a sudden all these people in Texas were like "Man, well the weather in Texas sucks, there's no state tax in California, let's all go to California", right? And then Texas, like all the property values can go down and there's like so many other things that can happen, which will determine what's going to happen on a macro level like you can't really account for that.
So all you can do is just follow that basic strategy, whatever strategy you have in mind, it has to work for all different types of futures. Then you calculate the probability of all your losses, the probability of all your wins, and you make a decision that's going to make you a winner in the long run. So the reason why I mentioned this is because oftentimes if you are giving advice to someone and it might be the solid strategic advice and if someone else actually listens to your advice, they can discount what you're saying if it actually doesn't go through for them, right?
So for example, in the 2016 elections, if you told everyone to bet against Trump, because Trump is never gonna make it and it seemed just so certain that Trump was not going to be president, right? If you looked at what um I can't remember the guy's name. Noah, the forecaster 531 I think something like that. Anyway, that forecaster, he forecasted that Trump would lose by a probability of 33% like I'm sorry, he forecasted that Trump had a 33% probability of winning, right? So if you have a very small chance of winning, it's likely that he's going to fail and if you are going to bet against his failure. Then you would probably come out well.
However, if you did bet against his failure, we saw what happened, Trump actually did become president because he had a 33% chance of winning and he actually won. So if you played that scenario out with 100 different futures and in 100 different futures, 33 of those futures Trump will win the presidency, right? And so this is kind of like how expected value works, how probabilistic decision making works and you have to have just conviction in your first decision.
So even if your decision doesn't play out, this is what poker players do really well is even when they're losing hands, they know that they made the right decision, and as long as they keep staying in the game they are going to get positive cash flow. So I hope that I hope this helps. This is Robin Copernicus. Boom, bam. I'm out.
Continue your journey with me on my other channels:
So I'm going to share a story on some advice that I've given in the past which has had a positive expected value. So when I say a positive expected value, this is like the strategy that you should use every single time because mathematically it's gonna work out, right? So if you think about it in terms of playing blackjack or in terms of playing poker. For blackjack, if you just follow basic strategy then that's gonna have the best outcome for your game. Right? Same with poker. With poker, when you're playing against other people, and you're evaluating different hands, there's gonna be, sometimes you're gonna lose some hands, you're gonna win some hands. But if you play the right strategy, the whole goal is to win more than you lose.
So with this piece of advice that I've given them the past, here's a piece, piece of advice that I gave: my advice was prices for real estate in Houston, Texas was way too high. It didn't make sense. When I evaluated what rental prices were compared to what mortgage prices were, it just seemed like renting a property was a no-brainer. There were a lot of different players, international players, so people from Mexico, China, all pretty much wanting to move their money into the US and they're buying properties, and what they're doing is they're buying properties in cash or overbidding. And for a long time you've seen this like huge boom in Houston.
And to me, my thinking is it's not sustainable because the property values are so high and the rental incomes that these properties make, it doesn't make any sense. And when I talked to a lot of different property owners, especially amateur property owners, amateur landlords, they will hope for a positive outcome in terms of appreciation for the property, and to get that appreciation, they're actually willing to take a loss in cash flow. But if you've ever actually studied like the science behind real estate investing, then it's really all about the cash flow because you can't bank on the appreciation, you can have some kind of expectation for appreciation, but a lot can happen, a lot can go on that will change the entire game.
So if you would have taken my advice back in the day and did not buy property, well then now fast forward into the future what you might be, like I would say wondering, you would probably be a little upset with me because Houston real estate prices have jumped up by a lot, like a lot, a lot. Um, so you probably would have lost in terms of opportunity cost 25% of whatever you wanted to invest. So if you were going to invest $1 million, you probably lost like $250,000 taking my advice, right? And then someone can take this example and say "Hey if I would have taken Robin's advice, I would have lost this entire amount of money basically, you know because I didn't take Robin's advice and I made this money. Don't listen to Robin." That could be something that someone might say.
But the thing is if you're smart and savvy then you know that when you are calculating expected values, yeah, you're gonna lose some and you're gonna win some. But what you want to do is you want to be playing the basic strategy, the one that makes the most sense. So no matter what type of futures you can come across, then you will end up winning. And when I say what type of future is like you're going to have different types of futures that will basically determine whether your hand is a winning hand or a losing hand.
So for Houston property owners, it's a winning hand because of things that are happening outside of Houston. California property values have been going up sky high. California has really high taxes. A lot of people are upset with the California government. So there's been this mass exodus of people leaving California and even New York and going to Texas. Texas doesn't have any state taxes. There's like a lot of benefits from living in Texas. And so you've seen this like max exodus. So if you bought property or if you've had property in Austin or Houston, then you're doing well because all these people from California coming in with the California money and driving up property values.
But the thing is there was no way for you to know what was going to happen if you would have taken my advice 10 years ago. So the sound advice would have been not to buy the property. But even if you would have taken my advice, you would have lost money. But where you would have to be certain at least in terms of your decision making skills, is that what if you if you were to live out a million different futures, would your decision actually bear fruit? Right?
So there could have been a million different futures. Maybe California said, you know what, we're going to get rid of taxes and now all of a sudden all these people in Texas were like "Man, well the weather in Texas sucks, there's no state tax in California, let's all go to California", right? And then Texas, like all the property values can go down and there's like so many other things that can happen, which will determine what's going to happen on a macro level like you can't really account for that.
So all you can do is just follow that basic strategy, whatever strategy you have in mind, it has to work for all different types of futures. Then you calculate the probability of all your losses, the probability of all your wins, and you make a decision that's going to make you a winner in the long run. So the reason why I mentioned this is because oftentimes if you are giving advice to someone and it might be the solid strategic advice and if someone else actually listens to your advice, they can discount what you're saying if it actually doesn't go through for them, right?
So for example, in the 2016 elections, if you told everyone to bet against Trump, because Trump is never gonna make it and it seemed just so certain that Trump was not going to be president, right? If you looked at what um I can't remember the guy's name. Noah, the forecaster 531 I think something like that. Anyway, that forecaster, he forecasted that Trump would lose by a probability of 33% like I'm sorry, he forecasted that Trump had a 33% probability of winning, right? So if you have a very small chance of winning, it's likely that he's going to fail and if you are going to bet against his failure. Then you would probably come out well.
However, if you did bet against his failure, we saw what happened, Trump actually did become president because he had a 33% chance of winning and he actually won. So if you played that scenario out with 100 different futures and in 100 different futures, 33 of those futures Trump will win the presidency, right? And so this is kind of like how expected value works, how probabilistic decision making works and you have to have just conviction in your first decision.
So even if your decision doesn't play out, this is what poker players do really well is even when they're losing hands, they know that they made the right decision, and as long as they keep staying in the game they are going to get positive cash flow. So I hope that I hope this helps. This is Robin Copernicus. Boom, bam. I'm out.
Continue your journey with me on my other channels:
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