It’s tempting, when investing, to think about possibilities. However, almost anything – with the exception of certain violations of mathematical or physical laws – is possible.
The fact that something is possible, doesn’t mean it’s probable. Even if you believe something is probable, or likely to happen, that information isn’t of much use until you put a number on it. Learning to think in terms of numerical probabilities, or probabilistic thinking, is an important skill to learn in investing.
Barry Ritholtz, over at The Big Picture, framed the difference between probability versus possibility quite nicely:
“Let’s define the terms Possible and Probable so that we all begin with the same basic understanding of these words. Something that is Possible may — or may not — come to be. There is no statistical insight provided, it is merely an outcome that may or may not come to pass. It is possible that you could get hit by lightning, or win the lottery, or marry a supermodel. When we describe something as possible, we mean there is a non-zero likelihood of that outcome — it could happen; we just don’t know if it will or will not, but it might.
What seems to confuse investors about possible is the statistical likelihood of occurrence. Can a company on the verge of bankruptcy go on to become the biggest company in the world? It is possible — and Apple (AAPL) did just that over the course of a 15 year from 1998-2012. But think about all of the many tens of thousands of companies that have been on the verge of going belly up. Is it possible that they could do the same?
Well, the answer is Yes, it is theoretically possible — but not very probable. And indeed, experience teaches us that most insolvent and near insolvent firms actually do go bankrupt eventually.
Probability is a the term for the branch of statistics dealing with chance and outcome.
Possibility is binary — can this happen or not?
Probable is more nuanced mathematics — there is a n% chance of a given outcome, where n = a number between 0-100.”
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