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Portfolio > ETFs > Broad Market

A Market Trend You Can Always Depend On

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There’s a game I often play with people – whether they’re engineers, students or even hedge fund managers. The challenge: Pick the ace.

I lay three cards facedown on the table and tell them to pick one, without turning it over. Mathematically, they have a one-in-three chance of being right. Then, I turn over a card they didn’t choose that’s not the ace. I give them a choice: Stay with your card or switch to the other unknown card.

Ninety-nine times out of 100, they stick with their original pick.

Then I’ll up the stakes by using 10 cards instead of three.  Now they only have a one in 10 chance of picking the ace. I then turn over eight cards, none of which are the ace of course. Again I give them a choice: Stick with your card or switch to the other unknown card.

Ninety-eight times out of 100, they stick with their original pick.

However, I know they should switch. Why? Conditional probability.

This game is a take on the Monty Hall problem, a concept that academics have debated for 80 years, and it’s still a powerful teaching tool. When you pick one card out of 10, you have only a 10% chance of being right, and a 90% chance of being wrong.

Those probabilities don’t change when I start to reveal the cards they didn’t choose.  There is still only a one in 10 chance they picked the right card to begin with.

Imagine if you played this game 1,000 times. How often would you expect the first pick to be right? 

Out of the hundreds of people I’ve played this game with, only two switched their cards after calculating the conditional probability. Both ended up working for me.

Why don’t the others switch? One Harvard-educated player of the game told me that she had figured out the probability she was wrong was 90% whereas the odds she was right were only 10%. But she then revealed that if she switched — and ended up being wrong because she switched — she would not be able to sleep that night.

Humans are hardwired to like consistency and commitment. But that bias often prevents us from calculating conditional probability correctly. Our emotions get in the way. It’s just too painful to switch and be wrong, even when the math overwhelmingly says it’s the right thing to do.

But we’re not in money management to concede to my own human biases. We’re in it to win.

People hire Longboard to protect and grow their wealth, especially in volatile markets like these. For that reason, I have to be the unpopular coach on fourth and goal who kicks the field goal to ensure a win rather than going for the touchdown and hoping for one.  This isn’t about emotion. It’s about putting statistics on your side to win in the long run.

We like being on the correct side of various trends and biases. That’s where the money is made. It certainly isn’t crowded. Because human nature, with all its faults, is the market trend that never ends.


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