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Fear of personal responsibility creates a market for worthless products delivered by high-paid experts.
Similarly, the Deutsche Bank predicted 8,200 to 8,600 points. The most pessimistic prediction came from the U.S. investment bank Morgan Stanley with 7,770 points. At the end of 2008 the DAX had tumbled to only 4,810 points. Not a single bank had foreseen the crash.
Bank analysts and asset managers are in charge of managing the world’s money. Can they predict exchange rates and stocks? No. But customers want to believe that they can, and banks do their part to maintain this illusion.
A somewhat more subtle method is: Keep making predictions, but don’t keep records. Roger Babson is credited with correctly predicting the stock market crash of 1929. What is less known is that he had been predicting a crash for years.6 The trick is to predict a downturn so many times that eventually it is bound to come true, and then forget all earlier forecasting blunders.
Elaine Garzarelli from Lehman Brothers became the Roger Babson of the 1987 Black Monday crash. On October 12 she predicted “an imminent collapse in the stock market.” Four days later it really did crash. Hyped as the “Guru of Black Monday” by the media, she became one of the highest-paid strategists on Wall Street. But the crash was her last hurrah.
The moral of the story is that among the thousands of financial experts there will always be some who get it right. Even a broken clock is right twice a day. But what if someone gets it right several times in a row?
How did professionals manage to do a worse job than nonexperts? The professionals seem to have based their predictions on specific information without being aware of its fickleness.
Can we find a simple solution for a complex problem? This question is rarely asked. The reflex is to look for complex solutions first and, if they don’t work, to make them even more complex. The same is true in investment.
But when Markowitz made his own investments for his retirement, he did not use his Nobel Prize–winning method. Instead, he employed a simple rule of thumb called 1/N: Allocate your money equally to each of N funds.
Seven situations were analyzed, such as investing in ten American industry funds.10 The mean-variance portfolio made use of ten years of stock data, while 1/N did not need any. What was the result? In six of the seven tests, 1/N scored better than mean-variance in common performance criteria.
Does this mean that the Nobel Prize–winning method is a sham? No. It is optimal in an ideal world of known risks, but not necessarily in the uncertain world of the stock market, where so much is unknown.
Say you invested in fifty funds. How many years of stock data would be needed before the mean-variance method finally does better than 1/N? A computer simulation provides the answer: about five hundred years!
How far we go in simplifying depends on three features. First, the more uncertainty, the more we should make it simple. The less uncertainty, the more complex it should be.
When a speaker uses opaque terms and phrases that no one really understands, there are always a few who are impressed. I know authors who don’t even try to write comprehensibly because they believe that otherwise their readers won’t find them intelligent.
PBM
“Now,” he continued, “I have learned something. If someone has a negative gut feeling, there is no point in asking him why. Because he wouldn’t know. We must ask a different question, and not to him. We need to ask ourselves whether he is the one among us who has most experience with the issue. If the answer is yes, then we don’t ask further questions and find something else to invest in.”
My research with managers suggests that the higher up they are in the hierarchy, the greater their reliance on gut feelings. Yet most said that when they have to justify decisions toward third parties, they hide their intuition and look for reasons after the fact.
Dr. Robert Sachs, a professor of mathematics at George Mason University, wrote: “You blew it! Let me explain. If one door is shown to be a loser, that information changes the probability of either remaining choice, neither of which has any reason to be more likely, to 1/2.” Another writer with a Y-chromosome commented: “You cannot apply feminine logic to odds. The new situation is one of two equal chances.” And another, even less charmingly: “You are the goat!”
“Where does it say that I have to let you switch every time? I am the master of the show.” Monty made it clear that the rules of the Monty Hall problem do not apply to him. “If the host is required to open a door all the time and offer you a switch, then you should take the switch. But if he has the choice whether to allow a switch or not, beware. Caveat emptor. It all depends on his mood.”
In the real game, probability theory is not enough. Good intuitions are needed, which can be more challenging than calculations. One way to reduce uncertainty is to rely on rules of thumb. For instance, the “minimax rule” says:
Equally important is the crucial distinction between the world of risk (the Monty Hall problem) and the world of uncertainty (the actual TV show Let’s Make a Deal).
Instead of physically spinning reels, digital random number generators are at work. The spinning reels on display create a false impression about the actual chances of winning. While the reel that the customer sees may have twenty stops, the true, virtual “reel” may have two to ten times as many. Their external design can suggest a one-in-eight-thousand chance of winning, as would have been the case on older machines, but thanks to the microchip designers, the chances are now hundreds or thousands of times lower.
The media attributed the victory to the information Lehmann was carrying. My interpretation is different. Studies with expert players in various sports show that their performance decreases when they pay attention to what they are doing or think too long.
Satisficing: This Northumbrian term means to choose the first option that is satisfactory; that is, “good enough.”
Diddnt know this is northumbrian
Simple rules can supply you with a good choice, protect you from wavering back and forth between alternatives, and save time you can spend talking with your dinner mates. Maximizing, in contrast, can leave you with the dispiriting feeling that you still don’t know whether you made the best choice.
Copying appears to be a taboo among Germans, unlike in more family-oriented countries where it is fine if you order what everyone else is ordering.
The alternative is satisficing: to go for a product that is good enough, not the best. After all, in an uncertain world, there is no way to find the best. Even if you got it by accident, you would not know and might still look for something better.
Although such services glorify the power of math to get you dates, there is no evidence that their algorithms lead to romantic relations that are superior to traditional ways of finding partners and lead to kissing fewer frogs.5 In fact, I recently met my calculating friend and found out that he is now divorced.
Yet actual choices of partners are mostly made in a different way. Not by calculation, but by a gut feeling. And sometimes that feeling is based on an unconscious rule of thumb. Here is one: Try to get the partner that your peers desire.
Sultan Saladin searches for a new wise man as his adviser. To test a candidate, the sultan offers him the woman with the largest dowry in his sultanate as his wife, provided he can pick her out of a group of one hundred beautiful women. If he can’t, he will be fed to the beasts. The women enter the room, one by one, in a random order. When the first woman enters, the wise man can ask about her dowry and must immediately decide whether or not to choose her. If not, the next woman enters, and so on, until he chooses one. The wise man doesn’t know the range of dowries and can’t return to a woman
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Dowry became secretary
Ultimately, the success of a relationship will depend on both partners’ behavior. How perfect your partner is will depend on how perfect you are. Thus instead of dreaming of the ideal partner, you should simply look for someone who is “good enough” (and be kind to that person).
Whatever the percentage is, we have again encountered a general rule for making good decisions of this kind: satisficing. Set your aspiration level. Choose the first alternative that meets your aspiration level and then stop searching. This strategy can help you find a spouse, a house, or other important things.
Common minimim program
If you are having difficulties hearing your inner voice, there is a much faster method: Just throw a coin. While it is spinning, you will likely feel which side should not come up. That’s your inner voice. You don’t have to make any complicated calculations to hear it. And you don’t have to bother looking whether heads or tails came up.
Even in the Western world today “popping the question” is often left to the male partner. In a historical context this one-sidedness is curious, given the traditional belief that women have better intuitions about romance.
This organization issued guidelines that CME should no longer be conducted in luxury hotels, but in other hotels adequate for the purpose. At this news six of the Berlin hotels panicked and dropped their stars. CME had become too good a business. Similarly, in the United States, the Loews hotel Lake Las Vegas removed the “resort” from its name to avoid putting off pharmaceutical groups, and other hotels followed suit.
Doctors often think that everyone else understands probabilities while they are among the few with a missing math gene. This is why teaching them in a group is so important, to show that they are not alone and no longer have to hide.
If doctors err on the side of too much certainty, as with mammography and first-trimester tests, they will tend to “see” genetic diseases that the baby doesn’t have. And if parents do not learn to think for themselves, using natural frequencies, they might abort babies who are perfectly healthy.
The major cause is the unbelievable failure of medical schools to provide efficient training in risk literacy. Medical progress has become associated with better technologies, not with better doctors who understand these technologies.
With a portion of self-irony, medical professors tell this joke: Two students, one from biology, one from medicine, are asked to learn the telephone book by heart. The biology student asks, why? The medical student asks, by when?
The problem with innumerate doctors, he said, may be a problem in New York or London, but not in Vienna. He himself teaches biostatistics and takes care that every medical student understands numbers. Positively surprised, I congratulated him. Then a young woman raised her hand. She identified herself as a former student of the professor. “I attended his course on biostatistics, and I can assure you, we didn’t understand a thing.”
The more patients become aware of doctors’ innumeracy and defensive decision making, the more trust will be eroded. Parents will begin to question the motives behind their doctor recommending an MRI or CT scan for their child, and women will begin to second-guess why they should have a C-section.
About ten million U.S. women have had unnecessary Pap smears screening for cervical cancer—unnecessary because, having already undergone complete hysterectomies, these women no longer had a cervix.
Sixteen studies with a total of 180,000 adults (under 65 years of age) investigated whether regular check-ups decrease cancer mortality, cardiovascular mortality, or total mortality. The answer is no three times over.27 Nor did check-ups reduce morbidity; that is, suffering from symptoms. The only effect found was that the number of new diagnoses among those who went for check-ups increased, making healthy people worry and leading to further diagnoses and treatments without noticeable benefit.
Prostate cancer is not a deadly strike out of the blue. In fact, it is highly common. Consider a group of five American men in their fifties. One of them is likely to have some form of prostate cancer (Figure
When these men are in their sixties and seventies, two or three are expected to have prostate cancer, and when they are in their eighties, four of the five will. Almost every man lucky enough to live a long life will eventually get it. Yet most will never notice because the cancer grows only slowly or not at all. Fortunately, the lifetime risk of dying
First, is there any evidence that early detection reduces the number of deaths from prostate cancer? The answer is no: There was no difference in the number of men who died of prostate cancer, no matter whether men went for screening or not. Second, is there evidence that detecting cancer at an early stage reduces the total number of deaths from any cause whatsoever? Again no.
All in all, most of the doctors in Germany and the United States drew wrong conclusions from survival rates. In addition, almost half of the U.S. doctors falsely believed that detecting more cancers proves that lives are saved.
Many women complain to me about the emotional pressure they get from their doctors. “You aren’t getting screened? Be sensible and think of your children.” And across all Western countries, women are still often treated like children: told what to do, but not given the facts needed for an informed decision.
First, is there evidence that mammography screening reduces my chance of dying from breast cancer? The answer is yes. Out of every one thousand women who did not participate in screening, about five died of breast cancer, while this number was four for those who participated. In statistical terms that is an absolute risk reduction of one in one thousand.22 But if you find this information in a newspaper or brochure, it is almost always presented as a “20 percent risk reduction” or more.
The writer Barbara Ehrenreich expressed her unhappiness about the infantilizing breast-cancer industry with its pink ribbons, teddy bears, and relentless cheerfulness.25 Has feminism been replaced by the pink-ribbon breast-cancer cult? she asked. When First Lady Laura Bush traveled to Saudi Arabia in 2007, what vital issue did she take up with the locals? Not women’s right to drive, vote, or leave the house without a man, but “breast cancer awareness.”
Komen has in fact dominated the pink ribbon marketplace, pairing, for instance, with M&M’s to sell pink-coated candies high in sugar and fat and with the fast food restaurant chain KFC to promote fried and grilled chicken sold in pink branded buckets, both foods possibly causing obesity and cancer.
