Hi Guys,
Here is a quote from Gerd Gigerenzer's book “Risk Savvy”: “People aren't stupid. The problem is that our educational system has an amazing blind spot concerning risk literacy. We teach our children the mathematics of certainty -- geometry and trigonometry -- but not the mathematics of uncertainty, statistical thinking.”
This quote appears in a recent article by the Motley Fool’s Morgan Housel titled “How to Scare Yourself Stupid”. It is an excellent short piece. The work addresses risk assessment and puts it in a proper context. Please access it at:
http://www.fool.com/investing/general/2014/08/05/how-to-scare-yourself-stupid.aspx?source=iaasitlnk0000003The article correctly identifies that the problem is tightly coupled to our statistical blindness, our statistical illiteracy. Based on my long running MFO post record, you all recognize that understanding and acting on a statistical/probability basis is a primary theme on my posts. So Morgan Housel and I at least share this one common agreement.
In the 1950s through the 1980s I managed a stock portfolio that ranged from 15 to about 30 holdings. Keeping track of this number of holdings, when augmented by perhaps 30 candidate alternatives, was just an overwhelming workload. In the 1990s I began a switch to actively managed mutual funds, 100% actively managed funds. Then I read John Bogle’s “Common Sense on Mutual Funds” followed almost immediately by Burton Malkiel’s “A Random Walk Down Wall Street”.
These classic books are statistically loaded documents. They are eye-openers in terms of an overarching investment philosophy. My current portfolio still has a 50/50 mix of active and passive mutual fund products. By nature, I test the waters slowly and incrementally. I have finally decided to mostly join the passive investor camp.
The statistics are substantial and persuasive, but I still retain some measure of a flickering internal fire for active funds. Some do just fine over extended timeframes regardless of unattractive overall odds.
Please enjoy the Linked article.
Best Regards.
Comments
http://news.morningstar.com/articlenet/HtmlTemplate/PrintArticle.htm?time=133710660
Well, that cut and paste didn't work for me. Sorry.
Thank you for taking time to read and respond to my post. Unfortunately, I could not successfully access the Link that you provided.
But I suspect that it might be the same reference that MFOer Ted linked in his post titled “Do Active Funds have a Future?”. I’m not sure if that is the case. If so, I have copied Ted’s Link for completeness and easy access as follows (if not, no harm done):
http://news.morningstar.com/articlenet/article.aspx?id=659902
Author and Morningstar researcher John Rekenthaler arrives at a somewhat surprising partial conclusion for a long-term Morningstar contributor. I say partially because he fundamentally proclaims a victory for passive Index investing, but with a few meaningful exceptions. In some fund categories, active management does deliver superior annual returns over a respectable timeframe. None of these findings are everlasting.
Rekenthaler’s conclusions do not depart significantly from those in the article that I referenced. It is also consistent with the findings that I have often referenced in the semi-annual S&P SPIVA Scorecard and Persistency studies. There are always a few mutual fund categories where active fund management outdistances its passive counterparts.
That’s why, although I find the accumulating evidence very persuasive for mostly a passive Index investment strategy, in select fund groupings, active management does what it is paid to do. Positive Alpha does exist! Of course, the challenge is to find it.
Thanks for your help and your interest.
Best Wishes.
“People aren't stupid. The problem is that our educational system has an amazing blind spot concerning risk literacy. We teach our children the mathematics of certainty -- geometry and trigonometry -- but not the mathematics of uncertainty, statistical thinking.”
>>>Nothing else is being taught that measures or assesses risk???
I see a bunch of risk assessment taking place in our school system; and "it ain't got noth'in" to do with math.
1. bullying
2. school lockdowns (practice drills) to prepare the staff and students for the event of a person who has chosen to cause harm at a particular facility.
3. plain old fights taking place in classrooms, the hallways and cafeteria.
4. risk literacy arrives in many forms in schools. Those who take the chances of failure from participation in any number and/or forms within the social fabric of a school society. Four years of being the backup quarterback for the high school football team, busting their butts to achieve a place or a position within any number of other school functions; but not always reaching the goal from any number of circumstances.
5. Sadly, for too many in some school systems, is the risk of being able to arrive at school for another day of study; without the risk of violence to them traveling to school.
The society of young folks in school systems is a world unto itself. There is risk with many things these young people deal with everyday within their school system; be it the staff/teachers or the other students of this special society.
I did not read the linked article; but hopefully it is more than data studies about math and risk, and how students do not understand risk.
Respectfully,
Catch
It would be frequently wrong to say students don't understand risk. But it would be equally wrong to say that they are adept at applying this understanding.
Thank you for your interest and unexpected reply.
Not unexpected in terms of a direct topic exchange, but unexpected by the focus change that your post took. Great stuff. I had not thought whatsoever of what beneficial impact a risk understanding would have on our youth if introduced early in the educational process.
But apparently Gerd Gigerenzer has made that linkage in his “Risk Savvy” book. I have not yet read this recent release, but I have ordered it and anticipate some practical lessons that are exploitable. The subject matter is in my curiosity wheelhouse.
I always focus attention on the odds of any real world scenario and how to improve them. Along those lines, I purchased Gregory Baer’s “Life: the Odds (and how to improve them)” a few years ago. Statistical data is fascinating.
For example, Baer reports that the odds of a golfing hole-in-one improve as the distance shortens (no surprise here). It’s 15,000 to 1 at 175 yards and drops to 13,000 to 1 at 150 yards.
As equipment has improved with time, so has the odds of bowling a perfect game. Currently the odds are 4,000 to 1 for each full game; twenty years ago those odds were a staggering 89,000 to 1. Change happens and matters greatly. Investors must be familiar with past stock market annual rewards to make informed investment decisions.
Gerd Gigerenzer is an acknowledged expert on risk identification and management. He is an advocate for an early introduction of statistical thinking into schools. Our statistical illiteracy is staggering and detracts from our successes during our entire life.
Gigerenzer’s answer is to incorporate a multi-component statistical curriculum starting at the sub-high school level. His proposed curriculum would include health, financial, and digital risk literacy segments. Each of these elements would be subdivided into statistical thinking, rules of thumb and the psychology of risk according to a review by Omar Malik.
Gigerenzer is a popular public speaker. He has recently appeared on a TED video. Here is a Link to one of his talks:
I hope you enjoy it. I did.
Thanks again for your comments. They certainly expanded the discussion context in a positive direction.
Best Wishes.