The Law of Small Numbers
The surprise outcome of the Presidential election is The Story of 2016. The campaign season was as unsettling and disruptive to the public consciousness as could ever be imagined. The attention of our country and much of the world bore down with such force as to render almost all other important stories lacking proper attention.
The political pundits, polling, prediction markets, and statisticians all came together in the fallacious conclusion that we were on the doorstep of a Hillary Clinton presidency. How did all the sophisticated computer driven polling, and data mining get it all wrong?
The law of large numbers is a principle of probability. The frequencies of events with the same likelihood of occurrence even out, given enough trials or instances. As the number of experiments increases, the actual ratio of outcomes will converge on the theoretical, or expected, ratio of outcomes.
Elections are only run one time. Polling of voters is a complex process rendered increasingly challenging as traditional methods of contact are disrupted by the cell phone, instant messaging and other forms of communication that are less accessible and often excluded from the data gathering process.
The difficulty of gathering large and diverse samples of people who actually show up to participate and vote is apparently one of the explanations as to why the pollsters, got it so wrong. With undersized samples and statistical techniques to fill in the gaps that proved defective, the pollsters may have had the biggest impact on the election of anybody as the house of Clinton stood relatively quiet in the smug belief that it had to simply show up and receive the Presidency. The endless coverage and long campaign season masked the underlying limitations of political science in measurement of such a dramatic matchup.
In the midst of all the incredible technology of today, we need to take a step back as investors and absorb this event as a reminder that sophisticated, all-knowing computers do not have the problems of the day solved. Self-driving cars, personalized medicine and home robotic butlers are not changing our world so fast.
Without large and diverse amounts of information, all we are left with is “sampling error”. Phillip Tetlock argues that the best forecasters possess “Dragonfly Eyes”. These “Superforecasters” seek many sources and continually evaluate and update their views as new information becomes available.
The surprises of the real world are never-ending, and as always, we need to dig deep to create a balanced and resilient disposition that can allow for patience and confidence in the face of the challenges to come.
David Perkins, a Harvard psychologist who has devoted his career to improving reasoning, … He says that thinking generally uses the “makessense” stopping rule. We take a position, look for evidence that supports it, and if we find some evidence— enough so that our position “makes sense”— we stop thinking. But at least in a low-pressure situation, if someone else brings up reasons and evidence on the other side, people can be induced to change their minds; they just don’t make an effort to do such thinking for themselves.
Haidt, Jonathan (2006-12-26). The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom (pp. 64-65)
In investing, and in all aspects of our lives, a consistent effort needs to be put forth in our pursuit of understanding and information gathering. Resist the urge to jump to conclusions or become frozen in ideology. Broad sources of information and data are critical to gaining understanding. Continuously questioning our beliefs and perceptions should lead to better decision making.
Recently the Economist Magazine published a fascinating story reviewing the challenges of the planned community, Celebration Florida. This is a tale of what the geniuses on high can design and the outcomes they yield in the real world.
From the article:
Judged as an attempt to recreate a quasi-mythical past, things did not go so smoothly. Part of Celebration’s appeal was that it would offer a public school with a private education. “What was promised was a revolution in education,” says Lawrence Haber, whose family was the first to move into Celebration, on June 18th 1996. Disney gathered experts from Harvard and Johns Hopkins universities, among others, to design the curriculum. There would be no grades. Classes would be mixed, with children of different age groups studying together. It proved a disaster. Kids slacked off. Without test scores, parents were unable to track their children’s progress. Arguments and fist-fights broke out between parents. The school eventually separated into two more conventional public schools.
The promises of high technology fared little better. The original vision involved fiber-optic cables to every home. It never happened. Neither did elaborate plans that resembled an ambitious early Netflix or those for community services online. A scheme in which residents got free computers in exchange for allowing their browsing activities to be tracked fizzled out once AT&T, Disney’s corporate partner for technology in the town, realized it had no use for the data, writes Douglas Frantz and Catherine Collins in “Celebration, USA”, an account of their first year living in the town in the late 1990s. Only the health center was an unequivocal hit. The hospital, run as a non-profit by the Seventh-Day Adventist church, feels like a resort hotel. It includes a gym and a spa.
I would love to talk the Harvard guru who thought up the idea of “no grades”. Too bad when that was proposed, there was no one there to ask, “are you out of your mind?” This story is a great reminder of the saying, “he puts his pants on, one leg at a time”. The PhD can be just as fallible as the rest of us. It is also a reminder that there is no utopia being designed by geniuses any time soon.
“Fake” “News”
Turn on the TV news programs today and you frequently find a group of people talking. The celebrities of this genre are mostly professional pundits, in the business of book sales and other media enterprises. The actual hard journalism is rendered minimal to non-existent as it is so easy to drop two combatants with opposing “views” into a ring and enjoy as the temp rises and they fight it out with opposing ideologies.
Much of this activity is not even related to the genre of what would be considered news, but rather it is much more closely related to talk shows. As the programs compete for viewers, the trend is likely to be susceptible to sensational topics and gimmicks to attract viewers. Much of the activity is more closely related to Jerry Springer than info that anyone can benefit from.
This type of activity on television is driven by simple economics. It is cheap and easy to seat a panel and throw questions to the group. From this format the viewer can feel like they are on the inside, sample the gossip of the day and actually learn something. It is likely quite worthless and damaging in that the actual difficult and expensive investigation, data gathering and journalism is not getting funded. TV is an ineffective medium for learning, debate, or discovery and what we end up with is junk arguments and manipulations of ideological operatives seeking to promote skewed ideas and agendas.
The Point / Counterpoint segment on the long-running News program 60 minutes may have been the birthplace of televised junk punditry. In the YouTube link below, notice the similarity of today to the angst that existed in 1978. Just change a few words and you would hear the nearly exact same complaints in 2016…not much has changed except hairstyles and the tragic loss of bellbottom jeans, eh?
https://www.youtube.com/watch?v=cESACuuh6kM
During that time, there was also a running sketch on SNL that many of my generation may remember as real comedic artistry.
To me, cable news is mostly rubbish as I am not interested in authors flogging book sales by trying to make clever and timely comments that have the shelf life of a mosquito. The national network news is so short and filled with breaks for pharmaceutical ads rendering it unwatchable. Learning, strategy and tactics of sophisticated investors come from the hard work of information gathering, patience and perseverance, not the “comment” of some self-promoting pundit, “strategist” or book salesman.
TV is the tip of the iceberg of what is now referred to as “fake news”.
There is a very low barrier to entry facilitated by the near zero cost of establishing internet news outlets. Techniques such as clickbait headlines, Facebook “news” or Google search manipulation are utilized for economic gain or message promotion without regard to real reporting. This is the rapidly evolving genre first exploited by conspiracy theory email chains and other nonsense disseminated by your “crazy uncle”. This is the cyber goo of info that is lower in quality than a Denny’s entrée…it draws people into irresistible stories that have little merit, fabricated with the intent of attracting clicks for advertising dollars, fostering malicious narratives, and a myriad of other motivations.
Our mind is saturated with the notion that we can see things as they really are. This is referred to as “Naive Realism”. It is shown over and over, that the human brain is a poor estimator of distance, time, and so many of the senses that we bank on as objective reality. We rush to conclusions based on tiny irrelevant small samples of info.
This is the essence of our cognitive bias and fragility…our mind is taking our own “data” and jumping to conclusions with instinct that has no filter or skepticism that the data is often clouded and riddled with flaws.
“There are no impartial ‘facts.’ Data do not have logic of their own that results in the same perceptions and cognitions for all people. Data are perceived and interpreted in terms of the individual perceiver’s own needs, own connotations, own personality own previously formed cognitive patterns.
Krech, DavidCrutchfield, Richard S.. (1948). Theory and problems of social psychology
2017 is going to be as challenging as any other year. We need to read books, find real journalists doing the difficult reporting and gather diverse views to form our opinions and world view. No big data or Yale/Harvard genius is going to bail us out with breakthroughs that make the investing process an easy success. Brace yourself as 2017 will be like all other years…unique and not subject to prediction.