What is randomness?

Radiolab's show on "Stochasticity" offers entertaining examples to explain the concept of randomness.   The story starts with the example of a 10 year old girl named "Laura Buxton" who released a balloon with a message: "Return this balloon to Laura Buxton."    The girl who received the balloon when it came down many miles away was another 10 year old girl named "Laura Buxton."  There were many other coincidences between the two Laura Buxtons. Contrary to the assumptions of most people, randomness involves results that look like patterns.  What about getting seven heads in a row? If you were only flipping the coin seven times, this can happen only one time out of 100, but if you get seven heads in a row somewhere in the process of flipping a coin 100 times, you can expect this to happen one time out of six, not improbable. Another example is the case of Evelyn Adams, who one the lottery twice in two consecutive years. If you look only at whether this will happen twice with the purchase of two tickets, it would only happen once in 17 trillion times. If you consider the entire universe of people who buy lottery tickets, the question becomes "what are the odds that somebody somewhere will win the lottery twice?" The answer to that question is that it would be surprising if that didn't happen repeatedly, and it has happened repeatedly (listen to minute 17 of the show). The lesson? (at minute 19) "If you don't see past yourself [to look at the big picture], you become prey to superstition." In the case of the Laura Buxtons, the story becomes much more interesting when we focus only on the similarities of the two girls and downplay the many many things they don't have in common.   But of course, listing their dissimilarities would not have been a good story, yet we prefer to believe in "magic"  (see min 20). See also, this post on patternicity.

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More options = more difficult choosing

Psycho-economist Sheena Lyengar tells us that the average grocery store today offers 45,000 types of products. The average Walmart offers 100,000. The ninth biggest retailer in the world, however, is Aldi, which offers only 1,400 products. Aldi's successful business model circumvents "choice overload." Less is more when it comes to choosing because more choices result in choice overload. In employee financial investment plans, more offerings means less participation. She recommends that we take a bit of time to think about the consequences of our choices in a vivid way to stay on target. Another technique is to order the complexity of our choices so that we start with simpler easier choices to ease into complex projects.   These strategies are worth considering, since the average person makes 70 choices every day.  Most people could use help "managing their choices." There is quite a bit of overlap in this topic with the work of Barry Schwartz, who presented on the "paradox of choice."

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Financial Advisors under the microscope

I recently finished reading Dan Solin's The Smartest Portfolio You'll Ever Own (2011), half of which is a damning indictment of most financial advisers. Solin makes a convincing case that those brokers who claim that they can pick stocks or time the market are selling unadulterated snake oil. In fact, avoid all of the following: Buying individual stocks or bonds. Actively managed mutual funds Alternative investments Variable annuities Equity indexed annuities Private equity deals Principal-protected notes Currency trading, and Commodities trading. Instead, Solin recommends the slow and steady historically documented growth associated with passively managed broad market index funds including many of the low-fee passively managed funds offered by Vanguard. Solin has ample shocking facts and figures to back up his claims and indictments, and he continues the attack on false claims and hidden fees here.

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