FUHGETABOUD SMALL PROBABILITIES
Small probabilities can be neglected when people assess a risk, while vivid rare outcomes can attract disproportionate attention. A useful review considers the chance, the consequence, and the capacity to absorb a loss.
THE IDEA
People sometimes treat an unlikely outcome as though it cannot happen. In other cases, a vivid outcome dominates attention even though it is rare. Both patterns can make a decision respond poorly to the probability involved. The mnemonic "FUHGETABOUD", a play on "forget about it", points to the first tendency.
A rare disaster can still matter if its consequences would be difficult to absorb. Conversely, an emotionally striking possibility should not displace a comparison with the other likely outcomes.
Putting the Numbers in Context
A small probability, such as 0.1%, is not zero. Converting it to a frequency or expected loss can make the comparison more concrete: 0.1% of $1M loss = $1,000 expected loss. That average is useful, but it does not describe how affordable the actual loss would be.
When reviewing a risk, ask what the estimate is based on, how uncertain it is, and what would happen if the rare event occurred. Compare possible responses, including their costs, rather than assuming that either ignoring the risk or eliminating it at any price is justified.
When to use it
A company evaluating whether to purchase insurance against a rare cyberattack; the bias could lead to rejecting coverage based on low probability rather than potential catastrophic loss.
Comparing the estimated benefits and risks of a medical intervention without allowing a vivid rare outcome to replace the full comparison.
An investor constructing a portfolio; ignoring tail risks (e.g., black swan events) could lead to excessive exposure to highly correlated assets.
A policymaker setting safety regulations for nuclear power plants; the bias may cause underinvestment in safeguards against extremely unlikely but severe accidents.
FROM THEORY TO EVERYDAY LIFE
In practice
Underinsurance against rare disasters
Homeowners in low-risk flood zones often choose not to purchase flood insurance, even though the low probability of a catastrophic flood could be financially devastating. They 'forget about' the small chance and focus on the high cost of premiums.
Investing in lottery-like stocks
An investor focuses on a stock’s chance of a very large gain and pays little attention to the other outcomes. Reviewing the full range of possibilities helps separate an appealing payoff from a sound assessment of the investment.
A MOMENT TO REFLECT
Put it to work.
Think of a decision you made recently where you ignored a small risk. How might the outcome have changed if you had properly weighed that probability?
How can converting probabilities into expected values help you avoid the 'forget about small probabilities' bias in financial planning?
In what situations might the bias lead you to overreact to a low‑probability event instead of ignoring it? What role do emotions play?
CONTINUE THE CONVERSATION
Source texts
- Antifragile (Nassim Nicholas Taleb)