Are you a better investor than a pigeon? We're going to answer this question by examining a light guessing game and from there we'll derive two main lessons for investing in the stock market.
The game requires you and a pigeon to guess the correct color of the next flashing light. Will it be green or red? You're also told that it will flash green 80% of the time. Do you win? No, you don't.
The pigeons learn to guess green all the time to earn a reward 80% of the time. The human subjects guess red on every 1 out of 5 guesses dropping their success rate down to 68%. The Pigeons learn to keep their strategy simple and to play the odds in their favor to maximize their long-term rewards. The humans think they can win on every guess which lowers their potential rewards.
To be a better investor and to maximize the long-term rewards you need to be like the pigeon. Keep it simple and guess green every time.
