Rats, Pigeons and Humans…Who’s better at predicting the future? (1)

By Chris Castles

Imagine you and I are doing battle in a game for high stakes.  The outcome’s being determined by the tossing of a coin six times.  You go first and toss H, T, T, H, T and H.  I go next and toss H, H, H, H, H and H.  A perfect run of heads and I’m a winner.

What’s the chance of that?

Well, while we might be surprised at the six heads, the probability of either result is exactly the same, one-in-64, or 1.6%.  So why is it that when we see the first coin toss results we think nothing of it, and when we see the run of heads we’re amazed?

Humans have a great ability to detect and process simple patterns.  It stems from our dangerous primeval times where it was one of the keys to our survival.  But when we come to investing, our talent for detecting patterns causes us to see patterns where none actually exist.  We try to find order where there is none.  Most animals can detect patterns but humans are obsessive about it.

Unlike other animals though, we believe we can predict the future even when we know it’s unpredictable.  Amazingly, it’s our higher intelligence that causes us to score lower on this kind of task than rats and pigeons do!

Remember that the next time you hear a bold prediction, or some expert is telling you where the market is going and why.

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(1) Adapted from ‘Your Money and Your Brain’ by Jason Zweig

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