Hi Guys,
I just don’t like statistics, I love statistics. As a youngster, I self-taught myself the arithmetical long-division process; I was motivated by a desire to calculate baseball players batting averages. Statistics are ubiquitous, especially in the financial world. As George Bernard Shaw observed “It is the mark of a truly intelligent person to be moved by statistics.”
Statistics serve useful purposes, especially when they are fully understood and their limitations are recognized. But statistics can be managed, can be both manipulated and abused. Near the end on my post, I’ll provide a couple of excellent commonsense references that explore statistics’ darkside in an entertaining and almost non-mathematical format.
Many splendid quotes succinctly document the dangers of mangled or misguided statistics. Besides his most famous “Lies, damn lies, and statistics” saying, Mark Twain also astutely remarked that “Facts are stubborn, but statistics are more pliable”. Scientist Ernest Rutherford noted that “If your experiment needs statistics, you ought to have done a better experiment”. On a higher level, Henry Clay concluded perfectly that “ Statistics are no substitute for judgment”. Hundreds of such quotes are easily accessible.
Without formally using statistical data sets and probability-based analysis, we make everyday decisions that are grounded in perceived statistical influences and odds considerations. I say perceived for it is sometimes the case that we think we know what isn’t actually so.
Which is more dangerous, having a gun in your home or having a swimming pool in your backyard? The likelihood of a child being drowned in a swimming pool each year is about three times higher than a child being shot to death by a gun. This statistical fact will surprise some folks. Why? Most of the population thinks in terms of vivid images enhanced by frequent media coverage, and are often lead astray. This phenomenon exists in spades in the investment community.
I have been a long-term MFO campaigner for better statistical understanding and application for citizen investors. Institutional investment agencies completely exploit the powerful tools of statistics and probability theory. To somewhat level the playing field, individual investors must do the same. Most do. However, a few MFO members criticize my efforts, believing that I go “a bridge too far”. I accept that critique as a badge of persistence and am not dissuaded from my goal. Regardless, here I go again.
Decades ago, while I was in college, my math professor exposed his classes to a simple statistics book that focused on the misuse and abuse of statistics. The book was written in the early 1950s by Darrell Huff; it is titled “How to Lie with Statistics”. It is considered a classic and a fun exposé of the discipline by many educators. I’m sure Professor Snowball is familiar with the work since it integrates well into his propaganda classes.
Recently, I have discovered a more modern version of flawed statistics as applied to social issues. It too is a wonderful and easy introduction to the statistical world. It emphasizes descriptive statistical methods and does not address inferential techniques such as correlation approaches. Given that shortcoming, it is still a nice doorway into the statistical house. The book’s author is Joel Best; the title is “Damned Lies and Statistics”. Several revised editions of this work have been released. The included stories are both fun and informative.
The good news is that both these fine volumes are now available on the Internet, and they are cost free. Here are Links to the two books I highlighted with the Best book listed first:
http://portal.tpu.ru/SHARED/k/KITAEVA/statistics/book/Tab3/damnedstatistics.pdfhttp://www.horace.org/blog/wp-content/uploads/2012/05/How-to-Lie-With-Statistics-1954-Huff.pdfPlease take advantage of these skillful presentations of statistical methods and how they can be exploited in a negative manner. Please read these short books and you’ll more fully comprehend the merits, the shortfalls, and the pitfalls of statistical analyses. As more statistical tools are added to your investment toolbox, a better informed investor will emerge.
As always, the buyer must beware of fraudulent data and incompetent applications. Enjoy and learn.
Let the MFO membership know what you think about these references. Thank you.
Best Regards.
Comments
I applaud the way that you managed to define yourself as "a truly intelligent person". Always nice to know where one stands.
You picked up on that too I see. But I see he edited out his smugness of being "a truly intelligent person". The damn lie is that you need any knowledge whatsoever of statistics to be a successful trader or investor. It's an almost 100% psychological game. I have over 500 books on trading and investing from the fundamentals to the technicals including math and stats. But the only books that really counted when it came to accumulating my retirement nest egg were the ones that dealt with investor/trading psychology and money management/risk control as well as the books on personal achievement and motivational/personal success. Money management/risk control is not math or stats but that time worn phrase of cutting losses, getting rid of your underperformers, and letting profits run. Simplicty always wins out over complexity.
Edit: And lastly, at least for me, this game is an art, not a science. Albeit I am not as arrogant as some to believe my way is the only way so for others it can be more science than art.
Regards,
Ted
Hi Jungster,
You must do very well with your investing program given your psychic powers. I presume you possess that power since you somehow envisioned something in my MFO post that never happened. I never edited any comments relative to any personal intelligence quotient. I did not conceive my opening paragraph as directly applying to me; it was inserted as a general, pity quote. Nothing more was intended.
It is true that when I’m alone in a room, I am the most intelligent person present. However, when my wife joins me in that room, I’m now the second most intelligent person in that room. I was wise enough to marry into intelligence.
When meeting anyone for the first time, my initial assumption is that they are intelligent. I have yet to be disappointed. Certainly some folks are more intelligent than others, but even that relative standing is transient. It depends on circumstance and subject matter.
I wish you success with your intuitive-based investing style. I certainly agree that prudent money management discipline, patience, cost containment, and risk control are all part of a successful investor’s toolkit.
I’m always baffled by the reluctance of a few MFO members to acknowledge the contributions made by statistical data sets when making an investment decision. Investing is awash in statistical measurements.
When an investor reviews a chart or consults a summary Table, he is being informed by a statistical collection of data. Most simply expressed, statistics are merely counting and organizing in a manner that allows for easier interpretation of information. Not all this information is honestly presented. That’s precisely why I submitted the references posted earlier.
There surely is no magical formula that guarantees an investment profit, but statistics of all sorts are used by intelligent investors to identify their investment opportunities and choices. For example, the broad statistic that equities deliver a positive annual return 70 % of the time with a respectable 6 % rate of real return encourages much of the activity on this fine MFO discussion exchange. The fact that equity prices ultimately reflect corporate profits, and that corporate profits are loosely correlated to national demographics and GDP growth rate are all statistically solid findings.
On a personal level, your decision when to retire, and the required size of your likely nest-egg that impacts that retirement decision, is informed to some extent by government life expectancy tables that project longevity. Statistics seep into many commonplace decisions.
A proper appreciation of statistical benefits and shortcomings tilt an investor’s success odds just a little in his favor. I agree that intuition should be a component of the investment decision process. But manias, bubbles, panics, and market crashes are all the product of an overactive, emotional investing public.
The currency of Wall Street is statistical data. Main Street would capture more of the business world’s profits if it was more strongly influenced by these same statistics.
You certainly need not agree with my reliance on statistical inputs, but it is an integral part of my investment strategy. I suspect statistics, in an unending variety, guide investment decisions for most MFO investors. To each, his own investing poison. I merely express my preferences. I wish you success using whatever method you freely choose.
I know that you make wise portfolio allocation and selection decisions because I know that you are an intelligent man. Everyone on this Board is intelligent.
Jungster, in Arthur Schopenhauer’s “The Art of Controversy” his 38th stratagem on ways to win an argument is to become personal, insulting and rude. There is no need to default to that trick. Your harsh judgment that I am “arrogant” is not supported by my many postings.
I admit that I attempt to make my case with as strong and as positive a presentation as warranted by supportable data. But I also incorporate data shortcomings in whatever position I advocate. I often admit that I struggle to achieve my target investment goals while simultaneously controlling downside risk. That’s a struggle we all confront in an uncertain investment environment.
I wish you health and continuing success in your investment program.