Some people, particularly those involved in finance, seem to have a lot of trouble understanding chance.
Imagine that on holiday in Australia you bump into your distant cousin that you only met at Pat’s wedding fifteen years ago and it turns out that she’s called her daughter the same name as you’ve called your daughter. What an amazing, unlikely coincidence, you think.
Now imagine that you are playing a game about the toss of a coin. You make a prediction of a pattern and toss the coin three times. There are eight possible series of three coin tosses. With heads as H and tails as T you can get:
Say you “bet” on HHH. All the eight sequences are as likely to come up as one another since it is a fair coin. So your odds are 1/8.
Now imagine that there are 7 other people playing. Each one bets on a different order. One bets on HHT, one on HTH and so on. Whatever order comes up, somebody wins. The chances of somebody winning are 8 out of 8, absolute certainty. But the odds of you or anybody else in particular winning are still 1 in 8.
The thing is, something happening on one occasion, predicted beforehand, might be very unlikely – but the chance of something happening when there are loads of repeats and opportunities for it to happen are pretty much certain, however unlikely it is at first sight.
This applies to “coincidental” meetings, you meet your cousin in Australia, but you might have met them somewhere else, on another occasion. You might meet a cousin, an old school friend, a former colleague and you might have in common the name of a daughter, a dog, the same camera – millions of chances for a “one in a million” occurrence.
It applies to the lottery, it is about 14 million to one against you winning but it is very likely that somebody does.
And it applies to investment funds. The chances of any particular fund being “above average” for 10 years running by pure chance are only 1 in 1,024, but there are over 6,000 funds in the UK, so some ought to do it sometimes – just like sometimes people win the lottery and sometimes you meet your cousin in Australia. They don’t.
But there is still a perception that there are great fund managers whose performance is nothing to do with chance and that you have a good chance to tell which ones they are beforehand.
Like I said, some people seem to have a bit of a problem with chance.