Six months before the 2016 US Presidential election, I started piling money into bets that Donald Trump would win. The next year, I did the same leading up to the Mayweather versus McGregor boxing match. The eventual proceeds formed the basis of a financial nest egg that I used to buy my own time and see the world.

I won those bets and others like it by understanding people.

What is a bet?

Let’s begin with first principles. To bet is to “risk something, usually a sum of money, against someone else’s on the basis of the outcome of a future event, such as the result of a race or game”. If you’re right, you win. If you’re wrong, you lose.

However, being right is not enough. You can be right about whether the sun will rise tomorrow and not win any bets because no one will offer you one. A bet requires a counterparty, i.e. someone who thinks you’re wrong. After all, other people don’t like losing bets any more than you do.

Thus, you win bets by being right when other people think you’re wrong.

What odds will you give me?

Not all bets are created equal. Sometimes, a bet will pay more or less depending on which side you’re taking. This is known as giving or taking odds.

Many people think that odds are determined by how likely an outcome is. This is somewhat true. The odds are actually based on how many people take either side. Or, more precisely, how many dollars take either side.

Like most things in life, bets are subject to supply and demand. If an outcome is perceived to be highly likely, many people will want to bet many dollars on it. This is no good for bookmakers, who make a living by balancing the amount of money wagered on each side. In response, they will adjust the odds.

Betting on likely events doesn’t pay well.

You versus Consensus

For bigger payouts, you want to win bets against a large number of people or very confident people. The best bets to win are against a large number of very confident people.

Pay attention whenever you hear something along the lines of “everyone knows that”. The phrase implies both majority and confidence. The only missing ingredient is for them to be incorrect. When confronted with something everyone “knows” to be true, ask yourself if they’re right.

If you think the consensus is wrong, you should be able to clearly explain why and how. What do you see that everyone else is missing and why don’t they see it? As the poker saying goes, if you don’t know who the fish is – it’s you.

In 2016, I surmised that election winner consensus was wrong for several reasons. The consensus was not properly accounting for social-desirability bias in the polls.1A mistake I believe they are about to make again. Within my social networks, I noticed that many previously-apathetic people were planning to vote for the first time ever. Conventional election polls used “likely voter” sampling methods that would fail to pick up on this. And having grown up in the Midwest, I understood rust belt state mentality better than those who hadn’t, e.g. coastal Ivy League pollsters.

If you think the consensus is right, are they right enough? It was widely recognized that Mayweather was the favorite against McGregor. However, the consensus grossly overestimated the latter’s chances. Odds implied an approximately 30% probability the Irishman would win. In reality, McGregor’s only chance of winning was Mayweather dying in a car crash on the way to the ring. Consequently, anyone betting on Mayweather got an unreasonably good price.

Contrarians take note: the majority is usually correct. The earth is round. Brushing your teeth is good for you. The Jets are an awful football team. Regularly betting against consensus is a surefire way to become penniless.

To achieve superior investment results, you have to hold nonconsensus views regarding value, and they have to be accurate. That’s not easy.

Howard Marks

Understanding People

If the majority is usually correct, when are they most likely to be wrong? When emotions, personal identity, and a strong narrative are involved.

Emotions get in the way of good judgement, leading to errors. An error that becomes a part of one’s identity will be fiercely defended by ego preservation. A strong narrative calcifies and spreads faulty conclusions because stories have a persuasive effect.

Once the majority adopts a faulty belief, it becomes difficult to disabuse them of it. I suspect that the human brain evolved not to seek the truth, but to embrace popular thinking. Most people would rather fit in than be right because the latter likely resulted in your exile (and subsequent death) during our hunter-gatherer days.

Politics and sports are fertile breeding grounds for erroneous consensuses because they feature emotional, identity-based, and narrative reasoning in spades. However, they exist in all manner of human endeavors. Just ask Harry Markopolos.

Of course, one must always be wary of falling victim to the same traps as your intended counterparties. Get into the habit of reasoning from first principles rather than copying someone else’s thinking. That way, you will already have your own ideas before you find out what the consensus opinion is.

When you’ve discovered a golden opportunity, do not be afraid to bet (what you can afford to lose.) They don’t come around very often.