Thinking in Probabilities

Statistical thinking will one day be as necessary for efficient citizenship as the ability to read and write. -Samuel S. Wilks

Thinking in probabilities is essential for navigating uncertain environments. It's a core theme throughout this site, and foundational to economics, finance, investing, and trading.

We don’t think in absolutes. We operate in grey areas - the domain of tail risks, black swans, probability distributions, and standard deviations.

We’re not seeking certainty; we’re searching for an edge.

Viewing a single outcome as deterministically inevitable is used for marketing, not trading and risk management.

We want to know if the Expected Value (EV) of our decision is positive - if our decision is a good one, regardless of the eventual outcome.

People often ask: "Isn't investing/trading a gamble?"

It's a fair question. The outcomes are uncertain. You can lose money on any given day. But the question misses a deeper distinction.

Think of it like this:

If you go to a casino to spin a roulette wheel or pull a slot machine, would you consider it a gamble? The answer will likely be yes - you never know if you'll win or lose... In short - It's luck.

However, what if we invert this notion?

Would you say that the casino is gambling against you?

Clearly not, though the previous logic applies; The casino can win or lose on any given spin of the roulette wheel. The outcome of a slot machine pull is chance. Over time, however, the casino has an edge on you - a business model... a strategy.

The house knows the odds and has a mathematical edge. Over time, the randomness smooths out and the business model prevails.

The casino doesn't win every time. But it doesn't have to.

It just needs to wins enough. And that's the difference.

It's not gambling, but strategy.

Let’s say you flip a coin: Heads, you double your net worth. Tails, you lose everything.

If it lands on heads, was it a good decision?

No - the EV is zero. You broke even on average - and you took on existential risk.

Similarly, if you go all-in with any two cards pre-flop in poker and crack someone’s aces, you didn’t make a good decision. You got lucky — but your process was flawed.

The outcome just happened to be in your favour this time.

This is the key idea:

Good decisions are not defined by outcomes. They’re defined by process.

A solid process - rooted in logic, data, and edge - will win over time, even if it loses now and then.

Nassim Taleb, in Fooled by Randomness, calls this idea “alternative realities.”

Howard Marks echoes it in The Most Important Thing — reminding us that every result we observe is just one path among many that could’ve happened.

Risk means more things can happen than will happen -Elroy Dimson

Howard, however, then expands on this idea.

Expected value matters. But what if some of the outcomes are not possible for us to withstand?

Because some outcomes are unrecoverable - You also have to survive the left tail.

"You don't want to be the skydiver who was right 98% of the time"

"Don't be the 6 foot man who drowned crossing the stream that was 5 feet deep on average."

We can't be happy to survive on average. We have to survive on the bad days.

This brings us to one of the most powerful ideas in investing and decision-making:

Heads I win, tails I don't lose much. -Mohnish Pabrai

We look for asymmetric bets.

You’re not seeking more risk for more return.

You’re seeking maximum potential upside with minimal downside.

That's what separates disciplined investors from gamblers.

You take small, calculated risks where the payoff - if you're right - is large, and the cost of being wrong is survivable.

In trading, this plays out with small, frequent bets - risking 1-5% where you believe you have an edge.

Rarely does a good trader risk everything. When they do - see Soros and Druckenmiller shorting the pound - it's because the asymmetry is overwhelming.

In value investing, your margin of safety is your edge.

You buy assets for less than they’re worth - and ideally, much less. Your research, patience, and understanding of intrinsic value reduce the risk of loss and amplify the upside.

This all leads to one core idea:

Survival is the foundation of all strategy.

You can’t compound if you’re knocked out of the game.

So before you aim for winners, ask:

• Am I protecting the downside?

• Do I have a repeatable edge?

• Can I withstand the worst-case scenario?

Most of the time, success doesn’t come from brilliance. It comes from discipline.

From staying in the game long enough for your edge to show up.

So no - investing is not gambling. Not if you approach it with statistical thinking, sound reasoning, and a deep respect for uncertainty.