Category: Bias

These two additional biases — hindsight bias and recency bias — are quite intuitive. When added to false feedback and confirmation bias, we are given a fuller picture of the mistakes that we make in interpreting results. Discussed today are:

• Hindsight is always 20/20, referring to perfect sight. But this is actually not the case. We are more likely to perceive things as 20/20 after they happen. When the result is known, its likelihood of an event seems far more likely than before the event; this is hindsight bias. This, of course, is not an accurate read of the situation — unless the odds were way off, you have just seen one possible outcome. There is an rationalization that happens to make people perceive events as more predictable when they occur. This can lead to a miscalculation in probability as the next related future event is thought of as inevitable. Reality is always probabilistic, never determined.
• Recency bias occurs when you overweigh the most recent events that have happened. We have a tendency to find what happened recently more predictive and more important than older events. Just because something happened more recently does not make it more predictive. This is not to say that recency is unimportant — there could be a reason for the uptick in a particular statistic or metric (and the skilled bettor will sniff out the difference), but for the most part, bettors put undue weight on what has happened in the immediate past, in spite of long-term trends. Instead, we are looking at long-term probabilities and, returning to our coin flip, there is no significance to 3 flips in a row the same–the long-term probabilities (50/50) remain the same.

Bias covers a large amount of area where you are misinterpreting the information needed to make a bet. You are miscalculating the odds due to a skewed frame which causes you to make mistakes. Often, these mistakes lead to losses where wins may have been possible. There are many types of bias — in this article, I will start with two:

• False Feedback: Let’s define a “GOOD BET” as a wager that has a proper risk/reward ratio. Simply put, you are potentially getting compensated at rate that reflects the risk in the wager. A “BAD BET” is the opposite – a wager where you are not potentially compensated at a rate which reflects the risk in the wager.  This is reflected in the chart below.

	GOOD BET	BAD BET
LOSING WAGER	1	2
WINNING WAGER	3	4

Quadrant 1 is an unfortunate place to be, but the best place to be if you are losing. With an edge, it is only a matter of time before you start to win (however, remember the gambler’s fallacy). Quadrant 2 is far more unfortunate. Not only is luck not going your way, but you are making bad bets without an edge. Quadrant 3 is where bettors aspire to — bets here win and were good bets that reflected your edge. Quadrant 4, however, is where most bettors get killed because they develop a bias from bad bets that win (and bad bets do win). The long-term ramifications of bias from the misinterpretation of winning wagers that were bad bets are great.  On the surface, it is very hard to identify a winning wager that was a bad bet, but deep down inside, we know that we just got lucky. We need to listen to that voice to avoid false feedback turning us away from our edge.

• Confirmation Bias: With this bias, you interpret new information in line with your pre-existing beliefs. Under this bias, this new information can lead to the strengthening or weakening of feelings about teams, horses, or whatever you are betting on. But instead of accurately discounting or adding to the your belief, your original belief–i.e. this team will cover the spread — shapes how you deal with the information; this is confirmation bias. In contrast, a bettor needs to look at each piece of new information carefully and objectively ask whether it makes the desired outcome more or less likely. It can be almost impossible to change one’s mind about a bet, especially with the “woulda, coulda, shoulda,” fears. Yet, if the new information suggests this, the unbiased bettor would make the move. You can’t be afraid to change your mind in light of new information that contradicts your original beliefs.