Thirty percent chance of rain

The author made an attempt to try a thought experiment by asking several people what it means to them when they hear the weather bureau report that shows that there is a 30% probability of rain over the Free State province.

The answers were surprisingly different and included responses such as, rain will fall in patches over the Free State, rain will fall over a certain part of the Free State, there may be no rain and if it does rain it will be over the entire Free State.

The right environment

The financial adviser who was asked this question made a good point: place your hand upon the shoulders of the client, walk to the window and look at the sky. You may get an answer according to the way the client sees the world: “when the clouds build like that in the east, it means that it will rain on my farm”.

The point is that, the client can put a theoretical probability into a real context, only if the financial adviser provides the right context for the client to work within.

Underlying the previous point is that there is a second layer of understanding that is called a thought error and many people make them.

In an experiment, doctors were told that a certain surgical procedure had a 10% mortality rate. Another group of doctors were told that the same procedure had a 90% success rate. Although the numbers add up to a 100% in both cases, the first group advised against the procedure, while the second group advised in favour of the procedure.

The above thought error is called framing and it applies to the first paragraph which states that the answers would certainly have been different if the report showed that there was a 60% probability of sunshine over the Free State.

Notable thought errors

There are several other thought errors and too many to name for this article but let us look at a few. The sunk cost fallacy is quite prevalent; once money (or any other valuable commodity) has been lost, perhaps because of a bad investment, that money is gone and agonising over it will be quite useless.

Evidently, how many of the readers have paid to go and see a movie and end up finding out that it is quite boring, yet they will sit right through the movie because they have paid a hefty price to see it, even though they would rather be doing something else that they really enjoy.

Another thought mistake is called the frequency error. When you buy a car, you will suddenly begin to notice your type of car and the color of your car everywhere you go.

This mistake is also made in the financial services industry. Once you have given advice to a client you will begin to see confirmation of your advice more frequently. Your advice may be wrong however, you will focus more on the data that supports your point of view.

Do not ignore errors

Thought errors are also a frightening occurrence, but in this case it is not a thought error. A client retires at the age of 65 with a certain amount of money, but actuaries tell us that this person may well live to the age of 85. This person is also very conservative in money matters. Here we see the true value of the adviser.

This conundrum, along with a whole range of thought errors can be predicted and planned for by using psychological profiling and computer models. These tools are not prone to thought errors, as they cannot be influenced by external factors. And yes, it did rain in patches, with a forecast of 30% probability of rain over the Free State.