Monday, November 21, 2005

Show me the money



My portrait of the perfect fool of randomness is as follows: he does not believe in religion, providing entirely rational reasons for such disbelief. He opposes scientific method to superstition and blind faith. But alas, human skepticism appears to be quite domain-specific and relegated to the classroom. Somehow the skepticism of my fool undergoes a severe atrophy outside of these intellectual debates:

1) He believes in the stock market because he is told to do so. — automatically allocating a portion of his retirement money. And he does not realize that the manager of his mutual fund does not fare better than chance — actually a bit worse, after the (generous) fees. Nor does he realize that markets are far more random and far riskier that he is being made to believe by the high priests of the brokerage industry.

He disbelieves the bishops (on grounds of scientific method), but replaces him with the security analyst. He listens to the projections by security analysts and "experts"— not checking their past accuracy and track record. Had he checked them he would have discovered that these are no better than random — often worse.

2) He believes in the government's ability to "forecast" economic variables, oil prices, GNP growth, or inflation. Economics provide very complicated equations — but our historical track record in predicting is pitiful. It does not take long to verify these claims; simple empiricism would suffice. Yet we have confident forecasts of social security deficits by both sides (democrats and republicans) twenty and thirty years ahead! This Scandal of Prediction (which I capitalize) is far more severe than religion, simply because it determines policy making. Last time I checked no religious figure was consulted for long-term business and economic projections.

3) He believes in the "skills" of the chairmen of large corporations and pays them huge bonuses for their "performance". He forgets that theirs are the least observable contributions. This skills attribution is flimsy at best — there is no account of the possible role of luck in his success.

4) His scientific integrity makes him reject religion but he believes the economist because "economic science" has the word "science" in it.

5) He believes in the news media providing an accurate representation of the risks in the world. They don't. By what I call the narrative fallacy, the media distorts our mental map of the world by feeding us what can be made into a story that can be squeezed into our minds. For instance (preventable) cancer, not terrorism remains the greatest danger. The number of persons killed by hurricanes, while consequential, is dwarfed by that of the thousands of isolated daily victims dying in hospital beds. These are not story-worthy, implying; the absence of attention on the part of the press maps into disproportionately reduced resources allocated to their welfare. The difference between actual, actuarially defined risks and the perception of dangers is enormous — and, sadly, growing with the globalization and the media, and our increased vulnerability to visual stimuli.

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