If so, you are also smarter than a major fund manager.
Once again investors are confronted with a LIST OF WARNINGS!!!
The basic idea is that the end of the world is near. The evidence is a laundry list of events occuring in close proximity with former occasions of the end of the world.
The reasoning offered is seductively persuasive. The background story is great -- sort of like the Hindenburg Omen or the Death Cross.
Your BS detector should be on red alert when you see this stuff, but can you really see the error? It seems so persuasive.....
The Doctors' Problem
As I have often suggested, investors benefit from stepping outside of their normal world. Try to think clearly about the following problem:
1% of women at age forty who participate in routine screening have breast cancer. 80% of women with breast cancer will get positive mammographies. 9.6% of women without breast cancer will also get positive mammographies. A woman in this age group had a positive mammography in a routine screening. What is the probability that she actually has breast cancer?
Only 15% of doctors answered the question accurately.
Give it a try yourself. If you grasp the concept, the answer will be easy.
If you can solve this problem, you will have a great feel for the error in the list of warnings. Please do not post exact answers in the comments, except to say that you have solved it. Email the answers to jmiller at newarc dot com and I'll hand out the awards! Some of my readers will nail this one.
I know that readers like things wrapped into a a nice one-article package, but I am not going to do that today. There are several important lessons here and you won't get them if I put it in a single piece:
- Hardly anyone can do probability problems accurately. You need to see how seductively wrong this is.
- Even the smartest market participants make many errors on causation and inference -- the includes some high-profile managers and high-priced analysts.
- If you can figure out problems like this, you have a real advantage.
I created and used a lot of problems like this in my teaching, but I saw a really good source with a more modern example. I'll catch up on giving credit with the solution.
No fair searching to help your answer! Do your own work!
And take pride if you solve this problem.