RQ or Risk Intelligence

Slate.com has an article (link) about Risk Intelligence which they term RQ (vs. IQ). The subtitle is: How Gamblers and Weather Forecasters access probabilities

For investors and traders, it can be just as important to understand what a person doesn't know as to have information. A false sense of confidence can lead to big losses. One quip that goes with that is "when in doubt, get out" or "when in doubt, sit it out."

The article has a secondary link to a free version of a RQ test. In more comprehensive testing, expert gamblers tend to have a high RQ. Kenny Rogers immortalized the sentiment in song lyrics in The Gambler (YouTube link2):
"You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
Know when to run."

The discussion also reminds me of the Ken Fischer Book "The Only Three Questions that Count." The three questions are:
(1) What do you believe that is actually false?
(2) How can I fathom what others find unfathomable? And,
(3) What the heck is my brain doing to blindside me now?

Overconfidence is the Achilles heel of many an intelligent person trying their hand at trading or investing. Often times a person is highly educated, and trained in some other discipline and think that their intelligence will be enough to do well in investments.

Another bad thing that can happen is beginner's luck. For beginner option traders, it often goes this way. The beginner buys low probability high risk options and makes money. Maybe they even repeat that, and get the idea that the game is easy. As most experienced option players know, there is no free lunch. Every trade has a probability of winning, the lower the probability, the higher the potential payout.

Option payouts tend to scale closely to the probability, so a 10% chance of profit often means the possibility of a 10-to-1 payout if the trade comes in. And the opposite, a 90% chance often means a person has to put up or risk $90 to win $10, but will win about 90% of the time. Of course, the broker takes their commission and the market maker their spread, so that deducts from the payouts.