I'm Immortal
I’m Immortal and I can prove it using valid and correct statistics! It’s pretty simple actually. To prove my immortality, I’m going to use the data from my life.
Here’s how the proof goes. Since the day I was born I’ve never had a day in which I died. Being my age, that’s just under 13,000 days. A fairly decent sample size (I think that with 13,000 flips of a coin we could determine the odds of getting heads or tails). But maybe for those of you who aren’t yet confident, let’s increase the sample size. In all 18,408,206 minutes I’ve lived (give or take a bunch) I’ve never died. Not once!
So based on my past data, the odds of me ever dying are less than 0.00…1%. In other words I’m virtually immortal! How cool is that?
However as we all know this logic is flawed, I will one day die. I’m no more immortal than anyone else. However there is no error in my logic. My sample size is large, quite large (over 18 million data samples with not one instance of me dying). Definitely enough to get a very high level of confidence, statistically speaking that is.
The flaw is that I can’t prove something positively, I can only ever really disprove something. In this case, just because I’ve lived over 18 million minutes without dying, doesn’t mean I’ll live another minute. In other words I can only prove that my theory is false, I can never be sure that my theory is true. I can be more confident, but I can never be sure.
And this is exactly what’s gotten the world in such financial trouble. Statements like “The market never goes down x% in a given month.” or “The US government can’t collapse.”. Our sample size just isn’t big enough. We can never prove this to be true, we can only disprove it. Just like we can’t disprove/prove we’re immortal until we die.
Therefore you have to be careful of what’s being said out there. Remember that rare events do happen, and they happen much more frequently than we think. Several are happening right now. The Feds bringing the interest rates to near 0%. The real estate market collapsing on itself. Deflation looking like it might be a real possibility. The government needing to bailout the corporate world on a never before seen scale. It’s all happening, yet it’s not possible. Another once in a lifetime event is happening again and again and again…
However there is good news. Learning and knowing to appreciate rare events can be an incredible benefit. You should plan for them, because although rare they do happen very frequently (that last sentence sure sounds like something Yogi Berra would say).
If you’re interested in learning more about this, I strongly recommend the books Fooled by Randomness and The Black Swan (the inspiration for this post). Both are amazing books that will really open your mind. And they’re not just about finance, they can be applied to anything in life.
Thank you also Jian for recommending these books.
· December 30th, 2008 · 12:11 pm · Permalink
Steph,
For a moment there I thought you’d either lost it, or gotten started on the New Years mixer drinks a tad early… š
Deflation. Funny you should mention this as I was saying this twelve months ago and folks said I was mad. Inflation, yep, they get that. But not deflation, nor why it’s potentially worse.
Oh well!
Happy New Year to you and your family! š
· December 31st, 2008 · 2:16 am · Permalink
Hi Scott,
I figured it was a good time of year to use such an intro š
I absolutely agree with you on deflation. I myself have been talking about the real estate crash since 2005 and people thought I was crazy then.
My newest comment that I get called crazy for is believing that the government won’t be able to honor it’s social security commitments, especially for old age! There’s just too many baby boomers and not enough money to cover the costs. Of course it will be too late by the time anyone decides to act.
Which also brings up another point. If a government can’t meet it’s financial commitments/obligations, does that mean it’s in default/bankruptcy? I know that if I can’t meet my payments I’m considered bankrupt. But some governments have the option of cancelling their commitments with no issues. Must be nice…
Happy New Year to you and your family as well! š
· December 31st, 2008 · 10:19 am · Permalink
There was a story that they used mathematical models to calculated the biggest wave they would see in 30 years to help design a new oil rig. They saw several that big in the first month. Oops.
· December 31st, 2008 · 2:27 pm · Permalink
Hi Andy,
Amazing isn’t it!
We still fall prey to this. I can’t remember the exact details, but in psychology there’s a test you can do where you have to estimate an answer within a range where it’s 99% correct. So for example how many kilometer/miles is it to drive from LA to New York. So you could say 1-1,000,000 miles and be 99% correct. But most people say something like 1000-2000 or something like that. And after taking the test, of the 10 or so questions, most people got 50% wrong! With ranges that were suppose to be 99% correct.
You also see this effect when people gather metrics. A lot of times people will remove the extremes from their datasets to balance it out. Bad move! They’re there for a reason š
· February 14th, 2010 · 2:26 pm · Permalink
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