I believe one of the most important math concepts someone should learn about in life and investing is probabilities. It helps us make sense of the world and make better decisions. For example, I have met many people afraid to fly. The probability of dying in a plane crash is about 1 in 3,000,000. In other words, there is a good chance you will never die in a plane crash. So, why would someone ever fear this?
Let’s now start applying probability to making money
My coworkers have a Friday pool for the mega millions. I used to play until I learned about options and probabilities. Perhaps I’m missing out on the camaraderie it builds as part of a team, but from a pure probability point of view, you’re better off buying “crazy” call options!
The chances of winning a game like mega millions can be 1 in 250 million. In other words, you will never win no matter how many coworkers pool together. But what if the chance of making money off an options trade was 50/50 or 60/40 in your favor? I certainly would take a 60% chance with my fun money to make more money. Your coworkers lost $5, $10 or $20 and perhaps you made $100. You know which is better. Warren Buffett always says the first rule of investing and money is to not lose it.
As mentioned, If you Google the probability of winning the lottery it was pretty low. Like .0000001%. So I could spend 5$ for a .0000001% probability of profit (POP), or I could buy a cheap put option that GE (trading today for $10.23) won’t close below $10.00 by Friday for a 20.75% of profit?
Probability and the company match
How about this one, when you contribute to your 401k and get the company match, there is a 100% chance of a 100% return on your money! You get the idea, it is important with personal finances and life to think about probability and make decisions in a rationale context. It could add a lot of value and money to your life. You may also make that fun flight to that tropical paradise for a week!