The Maleficent 7

Maleficent 7The Magnificent Seven is a terrific 1960 movie “western” about seven gunfighters hired to protect a small Mexican village from marauding bandits. A re-make is currently in the works and the “original is itself a re-make of Akira Kurosawa’s Japanese classic, Seven Samurai. Meanwhile, Maleficent is the “Mistress of All Evil” in Sleeping Beauty who curses the infant princess to prick her finger on the spindle of a spinning wheel and die before the sun sets on her sixteenth birthday. Today I’m offering up a mash-up from these movies to outline what I’m calling the Maleficent 7 – seven inherent human problems and limitations that impede our ability to make good decisions generally and especially about money. Continue reading


Signing Day and the Investment Process

davidYesterday – the first Wednesday in February and thus the so-called National Signing Day – was the first day that high school seniors could sign letters of intent to accept an athletic scholarship to play Division I college football in the fall. It’s the culmination of a long recruiting process and crucial to the success of teams and coaches. It can get more than a bit ridiculous.

Some players announced their intentions using live animal props, or worse. One recruit picked Texas over Washington based on a coin flip. At least it wasn’t for the gear, officially anyway. And Snoop Dogg will be giving up his support for USC to cross-town rival UCLA because his son picked the Bruins, where he’ll join P. Diddy’s kid on the team. Cornerback Iman Marshall, a big-time USC signee, has a self-styled “commitment video” that’s particularly absurd.

But the coaches and the media outlets that cover college football recruiting (of which there are an astonishingly high number) take it all very seriously indeed. As the parent of a DI player (at Cal, see above), *I* took it very seriously.

These various publications generally rate high school players being recruited via a “star system” of from two to five stars, with five stars being reserved for top 50 players, four stars for the next 250 (numbers 51-300), three stars for the next 500, and two stars for players who are considered “mid-major” and thus not good enough for the top conferences and teams. Alabama’s current recruiting class is usually reputed to be the nation’s best, for the fifth straight year, averaging out to 4.08 stars. And while it’s not much ado about nothing, it’s much ado about a lot less than you’d think, and in a different way than you probably think. Continue reading

More Probability Suckage

Source: xkcd

Source: xkcd

I have often noted (see here too) that we generally suck at math, to our great detriment. I have also noted that we are especially poor at dealing with probabilities. If a weather forecaster says that there is an 80 percent chance of rain and it remains sunny, instead of waiting to see if, in the aggregate, it rains 80 percent of the times when his or her forecast called for an 80 percent chance of rain, we race to conclude — perhaps based upon that single instance — that the forecaster isn’t any good. Data trumps our lyin’ eyes, but we don’t routinely see it (and even deny its efficacy).

Further evidence – as if it were needed – in support of my thesis has been offered this week in the reaction to Nate Silver’s projection that Republicans have a very real chance of gaining control of the Senate later this year. This forecast (“a Republican gain of six seats, plus or minus five”) is hardy earth-shattering to anybody who has been paying attention. The configuration of seats up for election favors Republicans and the Democratic President’s approval ratings are dreadful. There isn’t much reason to expect an upswing in Democratic support either, even though (obviously) almost anything could happen over the next few months. Dealing with probabilities necessarily means being wrong sometimes.

Continue reading

Worth Reading

Worth ReadingI wrote about probability earlier this week within the context of the unlikely and astonishing conclusion to this past Sunday’s Vikings v. Ravens NFL game. Such probability questions are looked at again here, with the added bonus of showing how a poker hand with similarly unlikely outcomes could have played out. Enjoy.  

If Ravens-Vikings Was A Poker Game

The Probability Problem

ProbabilityInvesting is a probabilistic enterprise. Since certainty is even rarer than high risk-free returns, we’re left trying to make the best decisions we can based upon the knowledge we have. If we do that extremely well, we might be right most of the time, but still a long ways away from all of the time. The improbable — the highly unlikely even — happens and happens surprisingly often.

Take yesterday’s NFL action, for example. More specifically, consider the astonishing Vikings v. Ravens game in snowy Baltimore. Continue reading

The Wyatt Earp Effect

The Big PictureMy first post for The Big Picture, the wonderful blog from Barry Ritholtz, also of The Washington Post and Bloomberg View, is now up. You may read it here. I hope you will.

The Wyatt Earp Effect

Retirement Planning’s Probability Problem

Probabilities2My latest Research magazine column is now available. Here’s a snippet:

The point here is that the highly improbable happens all the time but is always unexpected. This math explains why we shouldn’t be surprised when the market remains “irrational” far longer than seems possible. But we are. Randomness is difficult for us to deal with. Instead of dealing appropriately with probability, we look for patterns to convince ourselves that the numbers don’t really say what they clearly do. In this regard, we are dumber than rats—literally.

In multiple studies (most prominently those by Edwards and Estes, as reported by Philip Tetlock in his book Expert Political Judgment), subjects were asked to predict which side of a “T-maze” held food for a rat. The maze was rigged such that the food was randomly placed (no pattern), but 60% of the time on one side and 40% on the other. The rat quickly “gets it” and waits at the “60% side” every time and is thus correct 60% of the time. Human observers keep looking for patterns and choose sides in rough proportion to recent results. As a consequence, the humans were right only 52% of the time—they (we!) are much dumber than rats. We routinely misinterpret probabilistic strategies that accept the inevitability of randomness and error.

If we are going to recommend and implement probabilistic retirement planning strategies, we need to prepare for client and advisor difficulty in dealing with such concepts.

Retirement Planning’s Probability Problem

Gaming the Numb3rs

Last night at the Old Globe here in San Diego I got to see one of my favorite plays, Rosencrantz and Guildenstern are Dead, presented as part of the Globe’s 2013 Shakespeare Festival. Doing so brought the following post to mind in that it uses the play as a springboard for discussing probability and investing. I hope you will enjoy it — or enjoy it again.


Tom Stoppard’s Rosencrantz and Guildenstern are Dead  presents Shakespeare’s Hamlet from the bewildered point of view of two of the Bard’s bit players, the comically indistinguishable nobodies who become headliners in Stoppard’s play.  The play opens before our heroes have even joined the action in Shakespeare’s epic. They have been “sent for” and are marking time by flipping coins and getting heads each time (the opening clip from the movie version is shown above).  Guildenstern keeps tossing coins and Rosencrantz keeps pocketing them. Significantly, Guildenstern is less concerned with his losses than in puzzling out what the defiance of the odds says about chance and fate. “A weaker man might be moved to re-examine his faith, if in nothing else at least in the law of probability.”

The coin tossing streak depicted provides us with a chance to consider these probabilities.  Guildenstern offers among other explanations the one mathematicians and investors should favor —“a spectacular vindication of the principle that each individual coin spin individually is as likely to come down heads as tails and therefore should cause no surprise each individual time it does.”  In other words, past performance is not indicative of future results.

Even so, how unlikely is a streak of this length? Continue reading

Fixing the Math Suckage

DanicaI have repeatedly raged against our human failings with respect to all things mathematical and probabilistic (examples are here, here, here, here, here and here).  Therefore, I was delighted to see Danica McKellar (best known for playing Winnie Cooper on The Wonder Years, but also featured on favorite shows such as The West Wing and The Big Bang Theory as well as being a math whiz from UCLA) at this past week-end’s Los Angeles Times Festival of Books to promote various methods to help us (and particularly young women) to improve at math.  She was encouraging, engaging and even frequently insightful.  Danica (or at least Winnie Cooper) is also featured in The New Yorker today.  You can check out her books here. I encourage you to do so, especially if you are a young woman or have any young women in your life.  The odds are very good that you will be glad you did.

Consider All the Possibilities

I wrote earlier today about our general difficulty in dealing with probabilities in the context of Superstorm Sandy. Here is an interesting exercise broadly to test your abilities in this area and more particularly concerning information processing (from Michael Mauboussin‘s excellent new book, The Success Equation).  

Jack is looking at Anne but Anne is looking at George.  Jack is married but George is not.  Is a married person looking at an unmarried person?

  • (a) Yes.
  • (b) No.
  • (c) Cannot be determined.

To see the answer and an explanation for it, right-click over the text between the asterisk marks below (I tried to match that text color with the background as closely as I could; the text will “show up” when you do that).

* The answer is (a) but more than 80 percent of people choose (c).  You can reach the correct answer only by considering all the possibilities. If Anne is unmarried, Jack is looking at her and if she is married, she is looking at George.   This is a very helpful exercise for investing and for life in general. Consider all the possibilities. *