Friday, October 06, 2006

Are we being fooled by randomness?

This subject is something that most of us will have experienced somehow or rather at some point in life. So what we shall try to answer is the hidden role of chance we encounter in life and in the market. It is hard to escape from being a fool of randomness. Many times, at certain things we see, we mistake success is due to methodology or at other times we mistake it to randomness. Examples include some of those successful investors, salesmen, real estate agents, and so on. Often, many are fooled by any form of nonsense that is polished, refined, original and tasteful because of emotions. A handful of people are capable of looking through this trick of emotion that is associated with probabilities outcome and by doing so, they confine themselves from falling into the trap of randomness.

Suppose in a national coin-flipping contest there're 4 million contestants and each of them will all wager a dollar each. Each morning, they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous earnings are put on the line again. After ten flips, there'll be approximately 3900 people in Singapore who have called their flips correctly for 10 times in a row. They each would have won slightly over $1000.

Now this group of winners will perhaps start to get a little puffed up on what happened, human nature being what it is. They may try to be humble, but at some parties, they will occasionally admit what their technique is, and what marvelous insights they bring to the field of flipping.

Now assuming that the winners continue to play the game for another 10 days, we will have roughly 4 people surviving the game. Each will have a little over a million dollars. After 20 days of flipping, a dollar becomes a million. By then, this group will probably have lost their heads. They may write books on "How I turned a dollar into a million in 20 days working 30 seconds a day?" Worst yet, they may start jetting around the world to give seminar taking in say $2000 per audience on efficient coin-flipping and tackling skeptical people with "If it can't be done, why are there 4 of us?"

But then this group of skeptics may be rude enough to bring up the fact that if 4 million orangutans had engaged in a similar exercise, the outcome would be still much the same - 4 egotistical orangutans with 20 straight winning flips.

From the above what I am saying is many successful events may or may not be due to randomness. We must never mistake success as randomness or vice versa. Sometimes we mistake randomness as success and success as randomness. In identifying if things are due to randomness, think about this, 1) if you had taken 4 million orangutans distributed roughly as the population of Singapore; b) if 4 winners were left after 20 flips; and c) if you found 3 came from a particular zoo somewhere, you would be pretty sure you were on something. So you would probably go out and ask what the zookeeper feeds them, whether they had special exercises and so on. So, if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might otherwise be casual factors. Almost certainly, if a case of concentration of characteristics in a particular group who are left standing, this is not due to randomness. d) if all 4 winners turns up from different zoo with no particular set of knowledge, these orangutans can still turn their achievement attributed to randomness to fooling others into doing the same thing while getting paid for in seminars. Those others who subscribe to these random winners may get fooled by these 4 orangutans' random success as real workable means to achieving the same kind of success. By the time they realize the trick of randomness driving the 4 orangutans' success, they will have learned nothing but luck and perhaps some painful lesson which costs a bomb. I believe some of these orangutans lay in the classified section.


8percentpa said...

Haha, great story! Yeah I thought about this issue for some time. Is is luck or skill. You got it all figured out. Good one! Keep them coming

Berkshire said...

hi 8percent, thank you. I will try to keep things coming as long as I can learn new things along the way.