Tipping The Odds Of Financial Success In Your Favour
If you’re reading this, you’re probably a good worker, a hard worker, a sincere individual who wants to take major strides towards financial freedom. But it’s also possible that even though you have good intentions, you might have fallen short of reaching your money-related goals. Perhaps it’s time to take a step back and understand how to use the concept of probabilities to finally make your dreams come true.
Chance has its place in the financial game
Let’s use a gaming example to illustrate how understanding the odds can make a major difference in your financial future. In the world of casinos, you have the concept of the house edge. It’s basically a profit margin that a casino expects to make per average gaming session.
For example, a game like Caribbean Stud Poker has a house edge of around 5%, which means that in the long run, the house makes 5 pennies on every pound that goes into play. Now contrast that with something like online blackjack, which only has a house edge of 0.28%, and you can clearly notice a huge difference in terms of probabilities.
You can apply the same principle to financial investments, as well as activities to which you allocate your precious time. Always weigh the value you expect to get from each moneymaking endeavor against other available choices, and be aware of cognitive biases that could steer you in the wrong direction. This will enable you to better assess the financial game you’re playing and pick the option with the highest probability of success.
Subjective probability vs. objective probability
It’s also crucial to avoid making financial decisions based on subjective probability, which is derived from your personal judgement (or “gut instinct”). There are usually no detailed calculations to back this kind of opinion, and so any plan based on it is likely to fail.
You can counter this by grasping the concept of objective probability, where you calculate the actual odds that an event will take place based on a thorough analysis of a situation, instead of guesswork. In this scenario, you use hard data, and mathematical equations to calculate the odds of success or failure.
For example, the most important factor that determines the success of a new startup is the real demand and future growth of the market. You could apply subjective probability and simply assume that the market will grow and everything will be all right. But with objective probability, you would gather as much data as you can, and actively seek information that could dispel your presuppositions. Then, based on your analysis, you would accurately calculate the odds of success of your new venture, and weigh it against other available options to avoid incurring opportunity cost.
Quick tips for maximizing the chances of your financial success
Understand what other options are on the table
You may stay at your current job and hope for a promotion, but you can also broaden your mental horizon and consider all sorts of possibilities. Starting a business or a side hustle can transform your financial future, but before you take the leap, consider the probabilities. Ultimately 90% of startups fail, so these are not good starting odds. However, a side-hustle has a relatively high chance of success.
The odds of reaching your goals through different financial instruments
A security deposit at your bank is a safe bet, but in the current financial clime, it’s only a convenient way to park your money. Stock market investing presents more pitfalls, but on average, it can yield around 7% increase per year. The real estate market is great if you have the time and the expertise to play it right. Take a look at the whole landscape, not only a single instrument, as diversifying allows you to hedge your bets.
Come up with a solid financial plan
Setting savings and income goals can boost your chances of success by as much as ten times. You leave the realm of fuzzy assumptions and step into the clear light of financial focus. How much would you have to save each month to hit your early objective? What else can you do to maximize your income potential?
By answering these questions, you will start noticing new opportunities all around you, to a point where you become absolutely convinced that good fortune is on your side.
