Probability, Perspective and Perception
“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February” Mark Twain
“Better Not Look Down If You Want To Keep On Flying” B B King
Given last week’s stockmarket shenanigans I thought it might be a worthwhile exercise to test how good we are with numbers and in thinking things through. I came across some interesting material relating to our perceptions and perspectives, and how we arrive at conclusions. Wee bit of probability too.
The rules are simple. The questions are set out below. What I want you to do is note down your instant answers without spending time trying to work out what you think I want the answer to be. Then I’ll give you the correct answers at the end of the last page. Hopefully you may learn something about yourself. I did.
Q1) A bat and a ball together costs £1.10. If the bat costs £1 more than the ball, how much does the ball cost?
Q2) If it takes 5 machines 5 mins to make 5 widgets, how long will it take 100 machines to make 100 widgets?
Q3) In a lake there’s a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the lake, how long will it take the patch to cover half the lake? (By the way, if it helps, over half of the students at Harvard, MIT and Princeton got their answers wrong).
Q4) What proportion of the UK do you think is aged 65 and over?
Q5) Do you think that Germany’s population is younger or older than the UK’s?
Q6) Out of every 100 people aged 20 or over in the UK, how many are either overweight or obese?
Q7) How many in Australia would you think are either overweight or obese?
Q8) In a recent survey what percentage of people in the UK said they were happy or rather happy?
Q9) What would you guess if asked how much it costs to raise a child in the UK from birth to age 21?
Q10) Out of every 100 adults aged 25 to 34 in the UK, how many do you think live with their parents?
Q11) What percentage of UK total household wealth do you think the wealthiest 1% owned in 2017?
Q12) What has happened to the percentage of people globally living in extreme poverty in the last 20 yrs? Almost doubled- Remained the same- or almost halved?
Your answers will hopefully highlight how and where you obtain information. If you’d like to read more about “The Perils of Perception” I highly recommend the book by Bobby Duffy. And now for my thoughts on what’s going on out in the investment world…….
There’s definitely something odd about Octobers. History isn’t kind to them according to current consensus. Funny we only remember bad Octobers like 1973 when the Oil price trebled overnight. Or October 1987 when as many share prices fell than trees were blown down thanks to the Great Storm that weather experts never saw coming. (You may have forgotten that Sevenoaks became One-oak overnight). And then there was the Wall Street Crash in October 1929 which scarred pessimists so badly that generations of them expect another one every fall. Mmm, I wonder if that’s why Autumn is called The Fall?
But in their annual hunt for Red October pessimists forget about the majority when nothing untoward happened despite all the dire predictions that flourish around this time of year. And nobody mentions the Octobers when the bad times (called Bear Markets) ended. Yes really. Such as October 1990 and October 2002 when new Bull Markets started in the midst of consensus deep gloom. In the interests of perspective the Dow Jones in 1990 was 2365 and in 2002, 7181. (Today it’s 25250 as I write, down about 5% from the all-time high in September).
Here are some more perspectives. Last Wednesday the Dow Jones Index fell by 831 points, its worst fall since only February yet it triggered a tsunami of media shock waves. Next day an after-shock caused a further drop of 546 points. That’s 1377 points down in only 48 hours. A bloodbath, according to Twitterattis with short memories and an obsession with hyperbole. What would they have made of the 22.6% one day fall of the Dow Jones on the 19th October 1987, followed one week later with a further 8% drop? Never mind the three falls totalling some 35% in just over a week starting on the 28th of October 1929? Cripes.
One well known panic button the VIX saw an instant 160% increase in panic clicks last week. Another “volatility” measurement in the US, “The Fear and Greed Index” has actually slumped from “Extreme Greed” at 85 out of 100 a year ago, to 56 a month ago, on to a “Neutral” 51 reading a week ago, to “Extreme Fear” of a mere 5 on Friday. Five?? That’s as bad as it was early in March 2009 when the few remaining optimists were under siege and remarkable bargains went a-begging.
While last week’s drop felt bad, from a historical perspective it’s not unusual as I’m sure Tom Jones would attest. It’s not even the worst two day fall this year. The February drop you’ve probably forgotten about still holds that record. And putting it into further perspective “Wednesday’s bloodbath doesn’t even make the Top Ten worst days of the last 20 years. There was a nine-week stretch in 2008 that included 5 days more than twice as bad as last Wednesday.” Source: Eddy Elfenbein “Crossing Wall Street.”
Now it’s widely accepted that economics is a science. And in any science there are those who are clearly better than others. Stands to reason. And presumably that’s why “top” experts are the ones who are quoted most of the time. Which goes against what “legendary” economist J K Galbraith used to say. (He being the man who reckoned the only function of economic forecasting was to make astrology look respectable). For the record he opined that “experts quoted by the media are the experts the media want to quote.” If you get my drift.
Who remembers “the chief economist” at RBS being quoted widely in January 2016 saying “it was going to be a cataclysmic year” and advised investors to sell everything? Good job you didn’t, eh? And who remembers back in the summer of 2010 the predictions of ten “renowned economic experts” including Robert Shiller, Professor of Yale University, and Nouriel Robini, Professor at New York University, and luminaries representing Goldman Sachs, Institute of Directors and the National Institute for Economics and Social Research predicting an imminent double-dip recession. It never happened
Sadly we live in a world today where common sense is in short supply when it comes to debate and the sciences. Their consensus knows best apparently. And who are we to argue? Here’s what Harvard graduate and science fiction writer Michael Crichton has to say on the matter…
“I want to pause here and talk about this notion of consensus…. Historically the claim of consensus has been the first refuge of scoundrels. It’s a way to avoid debate by claiming the matter is already settled. When you hear a consensus of scientists agrees on something or other, reach for your wallet because you’re being had. In science consensus is irrelevant. What’s relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.”
There appears to be a consensus that the US is sinking in debt. Leaving aside the UK for a change (Brexit free zone today) here’s the US consumer balance sheet for summer 2018. Translated into simple language, their debt is less than 13% of their household assets. And two thirds of that debt is secured against their property, a mortgage in other words. And the average income pa is over 25% higher than their debt level. Doesn’t look like a problem to me.
And now the answers….
2) 5 minutes
3) 47 days
4) 17% (Average survey guess 48%)
5) Older, 21% over 65
6) 62 (av guess 44)
7) 62, exactly the same (av guess 51)
8) 92 (av guess 41)
9) £229,000 (av guess £100,000)
10) 14 (av guess 43)
11) 23% (av guess 59%)
12) Almost halved (only 10% guessed that). 45% of UK Respondents said it had almost doubled)
What does all that tell us? That we maybe still pay too much attention to media skewed stories? Do try not to. It’s good for you. Worked for me.