Why trying to win big every time is going to ruin you

One of the problems of today’s obsession with always winning is that it’s impossible. However hard you try, sometimes you are bound to lose. If that causes you stress and frustration, you’re setting yourself up for a good deal of misery. Good enough is often very good indeed, especially if you can steal just a slight advantage towards winning over losing. Here’s how this works.

Do those investors—Warren Buffet, for example—who make huge fortunes get their investment choices right every time? Do people like Steve Jobs of Apple never make any product or marketing mistakes? Of course not. What allows them to amass huge fortunes and a great deal of fame is not being perfect: it’s being right just a little more often than they are wrong.

That’s why an article by Charles Helliwell caught my eye recently. In it, he coined what he calls “51:49 rule.”

His view is that most of us get decision right maybe 51% of the time: just enough of an edge over being wrong to make slow progress.

His comparison is with casinos, where the rules make sure that the House always has a slight, but significant, advantage over the customers when it comes to winning. Enough people win—and sometimes win big—to keep people coming back and wagering more of their money. The fact that, over time, the House always has that small edge over the customers ensures the operation a solid profit. If too few customers win, they will stop playing and go somewhere else. The advantage that the House gives itself has to be small enough to avoid that, but large enough to make sure it always comes out on top.

Taking the long view

Of course, my point is a simple one—but it’s still often missed. If you take a short-term view, any loss seems like a disaster; any gain seems the start of a winning streak. Gamblers who think like this quickly lose their shirts. When they lose, they try to win big enough next time to make up the loss in a single wager. When they win, their believe in their sudden luck encourages them to take bigger risks =—and so lose more.

Only with a longer-term perspective can you see that being right only 51% of the time would still leave you in a winner’s position. Mr. Helliwell says:

Let’s just reflect for a moment, what the 51:49 rule actually implies. It means that everyone’s a winner, because if you’re right 51 per cent of the time, it means that you’re still two points up on the house and that puts you ahead, even though 49 per cent of your choices were poor.

And if you can learn from those mistakes, and push your advantage to, say 55:45, or even 60:40, you’ll eventually come out as far ahead as the casino does—reaping a fat profit despite all the times you still screw up.

If you can see that, you can relax and stop obsessing about your mistakes. Sure, you still try hard to be right, but a few errors aren’t going to change the picture overall. Indeed, their essential to the learning process.

As Mr. Helliwell says:

In our working lives, however, we tend to be rather more conservative when it comes to risk—which means that we often excuse ourselves from the opportunity of learning from our mistakes. This, in turn, loads the dice against us making correct choices in future even as they become more and more critical in our mindset.

Just so long as you maintain that small percentage point advantage over the tendency to screw up, you’re going to end up a significant winner over time. If you learn from your mistakes, you can increase that edge and make your wins enormous.

Just don’t do what the losing gambler does: focus on the big, short-term win and risk everything on a single throw. That’s bound to reduce you to penury. Smart investors aim for consistent, small wins. Dumb ones are suckers for “get rich quick” schemes and quickly lose everything.

We can all learn from that.

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