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“Half of the troubles of this life can be traced to saying yes too quickly and not saying no soon enough.”
— Josh Billings
If you’ve ever tried meditation, you’ll know that doing nothing for more than about 10 seconds is weirdly difficult.
If you haven’t, you might not realize just how much the human mind rebels against inactivity — an evolutionary inheritance from when doing nothing meant starving on the savannah (or getting eaten), I guess.
These days, our bias for taking action is nowhere more evident than in financial markets, where the headlines are always imploring investors to take action: Something is happening, they tell us, and we’d better do something about it — now.
Only the most stoic among us can resist for long — traders, investors, gamblers and even business people are constantly reacting to events and placing bets on their consequences.
But events are rarely as consequential as we expect.
One measure of investors’ propensity to overreact to events is options pricing: An academic study from 2003 found that traders so overpaid for put options on the S&P 500 that they’d need equities to experience a 1987-sized crash once every nine months just to break even.
That hasn’t worked out so well: 22 years later, there has still only ever been one 1987-sized market crash.
(Mercifully, Black Monday’s vertiginous drop of 22.6% remains the biggest of all time.)
Another measure of our tendency to overestimate the probability of unlikely outcomes is found at the horse track.
Two researchers studying the “favorite-longshot bias” concluded that “longshots are overbet, while favorites are underbet.”
Betting on horses with odds of 100:1 or greater, they found, resulted in losses of 61% — far greater than the 23% loss that bettors would have incurred by placing their bets randomly.
A study of prediction markets similarly found a “long-shot bias” among bettors causes high-likelihood events to be underpriced and low-likelihood events to be overpriced.
The long shots do sometimes hit, of course.
When Leicester City won the English Premier League in 2016, for example, it turned one fan’s £5 bet into a £25,000 payout — at 5:000:1, it was probably the longest-odds bet on a single sporting event ever to hit.
(Other 5,000:1 bets available at UK bookies implied that Leicester City winning the league was exactly as likely as Elvis being found alive or Barack Obama playing cricket for England.)
It’s fun to bet on something like that happening — it scratches our itch to believe that 1) extraordinary things happen more frequently than they do and 2) we have an ability to anticipate them.
Most of the time, though, you want to bet against things happening.
For example: One Polymarket bettor recently made about $2.1 million betting “no” on seemingly everything.
When you look at some of the bets on offer, you can see why that might be a profitable strategy: Polymarket betting implies there’s a 4% chance that Canada will be the 51st US state by the end of 2025 and that there’s a 13% chance that Jesus will return before the release of Grand Theft Auto VI.
I imagine the people betting “yes” on those are doing it just for laughs (surely Grand Theft Auto won’t take that long).
But these “yes” bettors could be doing us a favor by illustrating the power of betting “no.”
Prediction markets show that people bet in anticipation of things happening far too often.
Horse racing shows that people anticipate extraordinary things far more frequently than they occur.
And financial markets show that, even when extraordinary things do occur, they’re typically less consequential than we expect — how else to explain US equities being unchanged on the year despite all the unprecedentedly dramatic news on tariffs?
Liberation Day turned out to be far less consequential than feared — not quite a nothing burger, but seemingly unimportant for long-term investors.
In the meantime, traders betting that the dramatic tariff headlines were inconsequential — betting as if nothing would happen — would have cleaned up.
This is not unique to tariffs — there have been enough such instances that “nothing ever happens” has become a modestly viral meme.
“Nothing ever happens” isn’t meant literally; it captures the idea that despite a non-stop drumbeat of headlines about dramatic events, markets (and life) often stay surprisingly stable.
Polymarket even lets you bet on it: As it defines it, the probability of “nothing” happening in May has risen to 78%.
Even at those odds, it might still be a good bet because people so optimistically overestimate their ability to predict what will happen.
This “optimism bias” is a good thing for society — if founders correctly assessed their chances of success, no companies would ever be founded.
But their success rate might improve if they spent less time thinking about what’s going to happen and more time thinking about what won’t happen.
Jeff Bezos notes that he frequently gets the question, “What’s going to change in the next 10 years?” and “almost never” gets the question: “What’s not going to change in the next 10 years?”
That’s unfortunate because the second question, he says, “is actually the more important of the two.”
Bezos says founders and business executives should think more about what won’t change because it’s easier to build a business around “things that are stable in time” (like Amazon customers wanting low prices and fast delivery, for example) than it is around things that will be different in time.
But investors, too, should probably spend more time thinking about what’s not likely to change — effectively betting “no” on the constant drumbeat of predictions about what’s going to happen — and how that will change everything.
It’s a better bet than we’re hardwired to think.
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