A trader named Bob Stovall correctly predicted turns in the stock market for 18 out of 19 calendar years. Was he an investment genius?
You have a group of employees who are mastering their fields but every once in a while you have to provide some ‘correction’. When you try to reward the positive performances as all the research says you should, your team seems to do worse the next time out. When they blow it and you comment on their failures in a loud voice, they seem to do better next time out. Should you avoid positive reinforcement?
OJ Simpson was acquitted based largely on arguments revolving around statistical probabilities. How did that work out for the justice system?
On a game show, you are asked to guess behind which of 3 doors a Ferrari is parked. After your guess, but before telling you if you are right, the game show host opens one of the doors you did not pick. The Ferrari is not there… There are two doors remaining. Should you change your guess, or stick with your first choice?
You make your choices in buying good wines based at least in part on the various 100 point rating systems wine experts assign to different wines. You will pay more for a wine with a 90 rating than one with an 89 rating. Are you getting a better wine?
The Drunkard’s Walk, an amazing book by mathematical physicist Leonard Mlodinow (California Institute of Technology and the Max Planck Institute for Physics and Astrophysics in Munich), looks at these and many other fascinating questions. The answers (which you’ll have to read the book to learn) all boil down to the realities of randomness and probability. [pullshow]
The Drunkard’s Walk is at once a personal exploration of the impact of the random on our lives (his own birth and the fates of his parents are moving tales of random events and personal courage in Nazi concentration camps); a history of the mathematics of probability from the ancient Greeks and the Chinese to modern times; and humorous eye-opening examples of how badly we judge the impact of chance, chaos, and probability in sports, business, politics, and medicine.
The title of the book comes from an expression used by physicists to describe the near-random or ‘brownian’ motion of molecules in certain states.
Mlodinow asks some serious questions about forecasting the future probability of success based on past performance. Are the movie directors, fund managers, and drug company research scientists always worth what they are paid, or are they more often than not just plain lucky?
Mlodinow illustrates this question with the firestorm that erupted when a columnist named Marilyn vos Savant, the woman with the highest recorded IQ in the world, tackled the game show problem mentioned above. [pullthis]There is no field of mathematics or science where experts are more likely to be wrong than in the area of probability.[/pullthis] Called the Monty Hall Problem, after the host of the game show Let’s Make a Deal, the problem was debated in a way scientific questions almost never are. I won’t give away the answer here but let’s just say that when vos Savant gave her answer to the question “should you switch doors”? she received over 10,000 letters, almost all of them disagreeing with her. Over 1,000 came from PhD’s including people like Paul Erdos, considered to be one of the greatest mathematical minds of the century. And almost every single one of them was wrong. vos Savant was in fact right. You’ll have to read the book to get the answer!
What Mlodinow repeatedly illustrates, is that even rats are more successful than humans when it comes to solving some problems of probability. Our minds, designed to see patterns of meaning as a powerful evolutionary tool, are simply too good at seeing those patterns even where there are none. And furthermore, we try to anticipate patterns that cannot be anticipated. Research consistently shows that the human mind has real trouble both perceiving and creating anything truly random. The ‘gambler’s fallacy’ for instance, leads us to strongly believe that the odds of something happening in a random process (roulette wheels, slot machines, coin tosses, any ‘run of luck’) just because it hasn’t happened for a while (it must be ‘heads’ next because there have been a lot of ‘tails’), leads to a lot of heartache in betting and investing situations!
All of this has real implications for those of us in business. So much of marketing, human resources, and finance is based on our efforts to perceive and predict patterns. Without a basic understanding of statistics and probability, those in law, finance, and marketing are at real risk of basing perceptions and decisions on faulty interpretations of what is really going on.
The failure to understand the powerful role of randomness and probability in our lives leads to two serious consequences:
- the very real risk of misinterpreting financial, medical, or social data with possibly serious consequences; and
- the risk of making social decisions (if someone warrants our admiration for their success, for example) based on a flawed understanding of the forces at work in people’s lives.
[pullshow id="watson"]As Mlodinow points out, rewarding those who are successful, even when their success is due more to luck than skill, is not a huge problem. “But” Mlodinow writes “…it is a tragedy when a belief in the judgement of experts or the marketplace rather than a belief in ourselves causes us to give up…” He argues forcefully that we never know if success is around just one more corner.
So if putting too much faith in experts and systems and a perceived relationship between ability and success is often a mistake, what does Mlodinow suggest we do put our faith in?
Here is his answer: “What I’ve learned above all, is to keep marching forward, because the best news is that since chance does play a role, one important factor in success is under our control: the number of at-bats, the number of chances taken, the number of opportunities seized. For even a coin weighted toward failure will sometimes land on success. Or as the IBM pioneer Thomas Watson said: [pullthis id="watson"]‘If you want to succeed, double your failure rate.’[/pullthis]”
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