Apply Law of Probabilities

law of probability

 

I don’t believe in providence and fate, as a technologist I am used to reckoning with the formulae of probability. – Max Frisch

 

When in school we all studied the Law of probabilities. This law states that the possibility of a number to occur at any given time is 1/(The total count of the numbers). That means if the expected outcome of an action is positive, negative or neutral, the probability of outcome being positive is 1/3rd.

This law is crucially considered to decide the outcome of an event, action or process to know what are the chances of the outcome favoring the seeker. In other words if you presented an idea to your manager to increase productivity of the team and 2 of your colleagues also submitted ideas, the probability of your idea getting selected is 1/3rd unless the manager decides to select all 3. Similarly if you are in sales and you are out on the field to sell your product, not everyone’s going to buy it. If you talk to 10 people in a day, and for this product the ratio of prospect converting to customer is 1:10 then 1/10th is the probability.

The law of probability is useful in preparing action plan to meet the target. If the target is to get 5 customers each day and the conversion ratio is 1:10 then you ought to meet and talk to 50 people to have 5 customers. If you need some funding for your project or raise money for charity, you have to use this law to ensure that you reach your target. It is a myth that those who do well in sales are great  in presentation. They are able to close most of the prospects. Some people may have mastered the art of presentation and closing, however the secret of their high sale is they simply talk to more people.

If you want to succeed in exam, you have to solve sample papers at least 10 times to get better at the subject. Your probability of solving the test paper successfully is high.

How does law of probability help in reducing risk?

Risks are integral part of life. Risk becomes an issue if it is not anticipated and mitigated. The law of probability predicts the occurrence, the higher the probability of occurrence the greater is the focus given on the risk to mitigate.

Share prices roll on the stock market and their volatility is a cause of concern for many investors. A decision could mean a gain of millions or even billions of dollars or loss of it. Fortunes could turn tables with a single decision. This decision is taken based on the analytic recommendations and historical performance. The law of probabilities support the decision to buy or sell a scrip based on its probability to outperform its price considering number of variables that influence its price movement viz. index movement, govt. policy change, demand for the product in market, law of nature.

Thomas Edison failed a 1000 times before he invented the light bulb. Every failure he stated that he got closer to the solution, because the probability of success increased as he kept failing. Similarly if you are at a goal to achieve something in your life and aren’t being successful in achieving your goal, it only means that god wants you to try a couple of more times before you embrace success. That is the reason failure is considered to be stepping stone for success.

When the most successful surgeon is asked about how does he ensure that he succeeds operating a critical patient, he always mentions that his experience suggests 99% probability that he will be able to do well. The 1% probability of failure is there, however it is rare in occurrence.

To cut down the probability of failures one must:

Increase their numbers, increase number of rejects to get a Yes from the prospect.

Solve more number of papers to increase probability of answering the exam paper well.

Do more iterations of action to get closer to desired result.

If you want to find an address, what do you do? You ask people on the road for direction. You go a little ahead and then again you ask one more person. Why? To increase probability of being in right direction.

Cricket batsman or bowlers practice several times before they play real game. Practice reduces the probability of hitting a wrong shot or bowling a loose ball.

The astronauts are put in simulator for months before they actually go on mission. The simulated environment makes them prepared for the possible challenges they would face while in space.

Mastering the law of probability is a step closer to success. It gives a definite direction to take action to produce desired result. Apply law of probability in daily life.

To know what it would take to succeed at any goal ask yourself.

  • What is my specific goal. Is it to make 3 new customers every day or make 2 goals in a match.
  • What is the probability of succeeding? One in 10 for making new customers. Or Out of 10 ball kicks you hit the goal post twice.
  • What do you need to do to meet your goal? Talk to 30 new people every day or hit the ball towards goal post 10 times at the least.

Then prepare daily TO-DO list based on these numbers and execute them every day. This is a sure shot way to succeed in any challenging task that is bound up by uncertainties.

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Why do people struggle managing their Personal Finance?

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 What is your FQ, Financial Quotient?

John received his paycheck today. Though the figure is same as last paycheck he has ambitious plans. He is buying a new apartment in the suburb. The house is for 300,000$ and he is paying upfront 30,000$. The rest is funded by the bank. John is drawing a monthly salary of 6000$. The loan of 2.70k$ is going to add an EMI of 2800$. His monthly expense is 2000$ and he also holds a personal loan that he pays 1000$ every month. His net outflow is going to be 5800$. Good news he saves 200$.J. This may sound a bit dramatic. Our personal finance situation may not be as grave as John’s yet some of us are close to this situation.

 John will be moving in this new house in another month. He is getting furniture done. John is happy that he has made the right decision of investing in house asset. The price of this house will grow over years and his investment will multiply.

 The story of John takes a turn when his friend who is a finance adviser asks John to re-consider his decision of buying a house. This one decision will vaporize his cash flow. With just a few points change in interest rates or inflation he will have serious issue meeting his daily expenses.

 This is unfortunately a situation of many people. Many people choose to be ignorant about their financial requirements and trust the advisers who rip them off their hard earned money. It just takes a few steps to educate self of financial IQ or FQ.

 John was lucky to have a friend who would tell him what’s good for him. He helped John understand that what he is considering an asset that is his house is actually a liability. Since he is going to live in this house the rise in house price he cannot realize until he sells it. For John to sell his house 5 years from now, assuming its price has increased, he will have to move to another house. He may probably have to go for a bigger house as he would like to maintain his lifestyle and that house would also have price which would be multiple times of what it is now. So, the net is that what he earns selling in a house goes towards buying new house and additional loan. Another fact that John missed was that he will be paying interest on house mortgage. This interest almost doubles the cost of house every 5-7 years. This house shows as asset in the bank’s asset column while for John it is still a liability. It does not mean he can’t buy a house. Since it is his first house he would be emotionally attached to it. So instead of considering it as financial asset, it is his emotional asset. He has to create some real assets that would pay for the house loan. It could be generating some passive income through part time work or when he receives perks he can invest them wisely so that they grow and pay off the loan.

 What are the avenues available for John to create passive income?

 If his source of income is only through salary, he will have limited options of creating assets in above equation, however if he receives some perks he can invest them in instruments that generate wealth. There are 3 buckets that he needs to bucket his investment. The first bucket is the safety bucket. In this bucket he puts 25% of his perk amount in safety investment options like bonds, fixed deposits etc. The other bucket is growth bucket. Here he puts another quarter. This growth bucket is invested in mutual funds, gold, SIP’s. The 3rd bucket is aspirations bucket. In this bucket the remaining 50% of the investment is made. It is high risk investment. Without the high risk one cannot expect quantum returns. The high risk investment could be buying directly the stocks of valuable companies, buying small portion of land, private lending, commodities and derivatives. If one doesn’t know about derivatives he shouldn’t be investing in it.

 The miracle of this investment is that the second and third bucket investments will give quantum returns while the risk will be offset by the first bucket. This is a simple hedging tool to grow and yet be safe………………