What Are the Odds of Making a Good Investment?

Last week I stumbled upon an old Grantland article by David Hill titled: “Can’t Knock the Hustle”. [i] It is a fascinating examination of the two faces of competitive pool in the US. On one side was the traditional approach of conventional tournaments with prize money awarded to the winners (think the PGA Tour), on the other was ‘action rooms’ where the purpose of the pool matches was gambling – spectators and players would bet on the outcomes of all manner of games with a variety of handicaps applied. Although it is the same game being played, the objectives are entirely different – in one it is to find the best player, in the other to find the best odds. This distinction is important for investors. We spend much of our time trying to find the best investor, company, fund or story, and not enough time thinking about the odds.

The focus of the article was two characters. Earl ‘the Pearl’ Strickland – one of the most successful and controversial players in history (he has won over fifty major titles) – and ‘Scooter’ Goodman, a player focused on gambling and action rooms.

Although Goodman was a pool player, this wasn’t his primary skill:

“Goodman has a knack for figuring out complex odds and probabilities”.

His main enjoyment from pool was not the game itself, but in attempting to secure an advantage in agreeing the terms of the game. His edge was not in shooting pool but setting the odds in his favour.

“That’s my favourite part, the negotiating…This is where you win.”

Critically, Goodman understood that he did not need to be a great player like Strickland, he wasn’t interested in winning tournaments or climbing rankings. He just had to understand how good he was relative to the competition.

“I can play the best in the world up here if you give me enough weight”.

By “weight”, Goodman means advantages or impediments that impact the odds. This might be one player giving up all the breaks (a major impairment) or the weaker player having to pot fewer balls to win the rack. There is all manner of adjustments that can be made to transform the probabilities of the game.

While Goodman thought about little but the odds of success, as investors we are prone to neglect them. This leaves us incredibly vulnerable to making decisions where the chance of a good outcome is vanishingly small.    

Against the Odds

Why don’t investors like thinking in terms of odds? There are two reasons – because its less exciting than the alternative, which is largely storytelling, and because it is perceived as too difficult.  

Identifying a star fund manager, ten-bagger stock or the next great investment theme is far more captivating than trying to make a realistic assessment of the odds of success in that type of activity (particularly when the odds are usually terrible). When we have a compelling, narrative-led inside view, its salience means we grant it far more importance in our judgement than we should.

Calculating odds also feels like an inherently complex or even impossible task, but this is not the case. We don’t need to be spuriously accurate about the likelihood of a good outcome, just a general guide can be incredibly insightful.  

When making an investment decision, we should think about the odds of positive outcomes in two ways:

1) What are the base rates for this type of decision? This means forgetting the specifics of a situation but looking at the outcomes of a reference class of similar instances.

Let’s take an example. In 2021, Jeffrey Ptak at Morningstar wrote a timely piece looking at the subsequent performance of funds after they had returned more than 100% in a calendar year.[ii] The results were bleak – of the 123 funds that had achieved this feat since 1990, 80% went on to register losses in the three years that followed. 

This type of analysis is about creating a base rate to provide us with an outside view on a decision. When looking at a fund that has produced stratospheric returns it is very easy to be beguiled by the inevitably compelling stories that will be told about the theme and its manager. This can leave us entirely blind to the odds we are likely to be facing.  

There is no right answer on base rates, no single metric that will provide precise and accurate odds but taking this type of outside view should be integral to any investment decision.

2) How difficult is the game we are playing?  We should also spend time reflecting on the difficulty of the task we are undertaking. Imagine we are trying to forecast where ten-year treasury yields will be at the end of the year. We can carry out forensic analysis of inflation dynamics and Fed policy, but before beginning this process we should be asking – how likely is it that we are going to get the answer to such a complex question right? 

Overconfidence leads us to involve ourselves in investment activities where the sheer difficulty of the activity means that a successful result is very unlikely.



Thinking about odds and probabilities is not intuitive and often uncomfortable, but it should be essential for all investors. It is far better to be an average investor with the odds on our side, than a good investor with the odds stacked against us.  


[i] » Can’t Knock the Hustle (grantland.com)

[ii] What to Expect From Funds After They Gain 100% or More in a Year? Trouble, Mostly | Morningstar

Which Books Should Investors Interested in Behaviour Read?

Although I am clearly partial to a blog post and enjoy a good tweet or thread, few things can beat reading a great book. The beauty of a book is not just the depth in which a topic can be explored but the focus it necessitates – the physical act of buying and reading one can act as a commitment device, encouraging us to learn something new or think about something differently. Books do not make us immune to the enticement of other attractions competing for our attention, but they can add a healthy element of friction between us and the next shiny object.

I often get asked which books an investor keen to learn more about behaviour should read, and almost certainly give wildly inconsistent answers. To rectify that, here is a list of some of the books that have most influenced my thinking and are also brilliant reads. The majority of those listed are not explicitly related to behavioural finance, but they are all about how and why we make the decisions we do:

Annie Duke – ‘Thinking in Bets’: A fantastic book which not only extols the virtues of probabilistic thinking but manages to do so in an engaging and captivating fashion.

Jeffrey A. Friedman – ‘War and Chance’: Something of a hidden gem, ‘War and Chance’ is a fascinating study of decision making under conditions of uncertainty through the lens of international politics. Particularly insightful around why people are reluctant to talk in probabilistic terms.  

Tren Griffin – ‘Charlie Munger – The Complete Investor’: Nobody speaks more lucidly on investor behaviour than Charlie Munger, and Griffin does an excellent job of distilling his wisdom. Those short on time should read Munger’s speech: “The Psychology of Human Misjudgement”, which is probably the single best piece of work on investor behaviour. 

James Montier – ‘Behavioural Investing’: If my unreliable memory serves me correctly it was James Montier’s forthright and humorous writing on the vagaries and inconsistencies of investor behaviour that really got me engaged in the subject. This book is hard to get and expensive, but Montier has a ‘Little Book’ version, which incorporates some of the insight and ideas of its larger sibling.    

Daniel Crosby – ‘The Behavioral Investor’: Not only does Crosby’s book provide a great overview of how behavioural concepts interact with our investment decisions, but he also offers practical ideas about dealing with our most damaging foibles.

Daniel Kahneman – ‘Thinking Fast and Slow’: Just in case this hasn’t been read by everyone, it is worth highlighting the book that became the foundation stone for the burgeoning interest in behavioural science. No, not every study cited replicates; but yes, it is a great introduction to human behaviour and the choices we make.

Gerd Gigerenzer – ‘Risk Savvy: How to Make Good Decisions’: Gigerenzer’s work is incredibly underrated. His focus on the effectiveness of simple heuristics and decision rules to navigate complex systems is essential for investors who are constantly faced with a volatile and unpredictable environment.

Peter Bernstein – ‘Against the Gods – The Remarkable Story of Risk’: Achieves the extraordinary feat of explaining the history of risk – from Greek mythology to portfolio insurance – in an entirely fluent and engaging manner.   

Nassim Nicholas Taleb – ‘Black Swan – The Impact of the Highly Improbable’: Although the term ‘black swan’ is now widely misused, Taleb – in his own inimitable style – covers the folly of predictions, the dangers of models and the often-neglected impact of extreme events. Essential lessons for any investor.

Michael Mauboussin – “The Success Equation: Untangling Skill and Luck in Business, Sports and Investing”: No investment writer has a higher signal to noise ratio than Michael Mauboussin, his hit rate for producing distinctive and rigorous work is unsurpassed. “The Success Equation” is particularly important for investors because one of our primary failings is our inability to distinguish between luck and skill – a consistent and costly mistake.

Will Storr – ‘The Science of Storytelling’: Not obviously about investing or behaviour, Storr’s book looks at humanity’s fascination with stories and how and why they have such a profound impact on us. It is hard to think of any investment behaviour that doesn’t have a story at its heart, which makes understanding narratives essential to understanding our decisions.

Rory Sutherland – ‘Alchemy’: Aside from being very funny, Sutherland’s book challenges conventional wisdom about our behaviour and encourages counter-intuitive thinking.

Robert Cialdini – ‘Influence’: A timeless psychology book. As investors we are always being influenced or trying to influence others. Cialdini breaks this process down into six critical principles.  

Morgan Housel – ‘The Psychology of Money’: The beauty of Housel’s wildly successful book is its coupling of vivid storytelling with broad appeal. It is a book about our relationship with money but it’s not for investors, it’s for everyone. 



I have inevitably missed some personal favourites that weren’t in my mind at the time of writing and there are also those which, tantalizingly, I have not yet discovered!