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9 Jan 2014

Avoiding Gambler's Fallacy in Your Business

How people think: if you have been having 3 boys in a row, you will think that your chance of a girl the next round will be high.  Truth is that the gender of your next child has nothing to do with the gender of the previous child.  This is because each sex has an equal probability independent of the last one.  The failure to recognize this is called 'Gambler's Fallacy', which reflects how people make mistake in their decisions by mistaking that the past will predict the future.

Anyone that try to foretell your fortune for 2014 will end up being wrong most of the time, simply because they base their prediction on the past. We all know the failures of companies like HTC, Nokia and Blackberry: they produce their products based on past demand and end up with excessive stocks.

The truth is that everything that happen today is made up of many factors happening not just now, but in the past.  There is no one single factor that we can attribute to any success of failure. Like we know Apple's iPad Air sells well not because it is thin, but because of the lack of competing products and other factors including its price and the fast A7 processor.

In the book "Why Smart People Make Big Money Mistakes" by Thomas Gilovich, the following 5 points are worth your reading:
  1. Look always at the long term trends, not short term trends as they are volatile and may not repeat itself.  
  2. Play averages because chance plays a great role in the short term, but in the long term, things will average out.  Like a company that has good products with strong R & D will win over another company with strong marketing but weak products. 
  3. Always read the fine print, because what the large print gives, the small print takes away.  Do not take risk by ignoring the fine details. 
  4. Know your odds.  The odds of winning the lottery or Singapore Sweep is much lower than being stuck by lighting or having a crash in a aeroplane.   In business, your odds of success is higher than your odds of failure if you focus on what you know
  5. People pay more attention to big numbers than they do to small numbers.  So to make a product appear more affordable, present it in small numbers, like cost per day. 
In short, be aware of the Gambler's Fallacy that things will remain the same today base on yesterday's situation.   Your situation today is base on long term trend, so you need to start working today to build a better trend tomorrow.  Do not depend on luck because the odds are against you! 

By Andy Ng, Chief Trainer at Asia Trainers.  Successful companies know that the better trained your people are, the higher is your company's chance of success.  But you cannot just do training today and expect success tomorrow.  Start training today and over time, your company's competencies will strengthen and your chance of success will be higher.  

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