To a Journalist, “it’s a small world,” afterall.

To a Journalist, “it’s a small world,” after all.

You are walking through Kmart (or Country Road if you are a snob), when you run into your cousin from across town….

“A … misconception of probabilities arises from the random encounters one may have with relatives or friends in highly unexpected places.  “It’s a small world!” is often uttered with surprise.

But these are not improbable encounters….

It is just that we are not truly testing for the odds of having an encounter with one specific person, in a specific location, at a specific time.  Rather, we are testing for ANY encounter, with ANY person we have ever met in the past, and in ANY place we will visit during the period concerned.

The probability of the latter is considerably higher, perhaps several thousand times of magnitude of the former.

When a statistician looks at data to test a given relationship, say to ferret out the correlation between the occurrence of a given event, like a political announcement, and stock market volatility, odds are that the results will be taken seriously.”

(Fooled by Randomness – Taleb p 148).

Journalists DAILY provide us with reasons that the market moved up 2%, or crashed 3%.  All noise of course on a short-term basis.  But they are just reacting to the any relationship, small world sample, and making any connection.

In fact, “Causality can be very complex.  It is difficult to isolate a single cause when there are plenty around.  This is called Multivariate Analysis.”  (Fooled by Randomness, p197).   To imply causality, ALL possible reasons for the stock move must be looked at, both in isolation and jointly, with calculated confidence levels to arrive at the conclusion.

I studied Statistics a bit at University, and whilst I forget WAY more than I remember, I DO remember that those Multivariate Analysis calculations were pretty damn complex.  I’m also sure the media is not running those before they make their claims!!!  (Remember what I said about statistician’s results, and being taken seriously – I am no statistician!)

Consider….

…the three major indices rebounded on Friday thanks to a solid GDP report…

The bond markets, meanwhile, struggled in Friday trading on the news that “Bond King” Bill Gross is leaving PIMCO, the firm he founded, for Janus Capital.

When you look for any relationship to explain data, it will often amaze people.

Couple that with the human need for a “story or narrative” (Nick and Jarrod did a webinar on this which I thought was great) and you have modern media defined to perfection.

I was in NY recently, and saw the block-long lines for tickets to the upcoming “Star Trek Convention” getting airtime on the Midday News.  The Dow was down that day a little….

I can see the headlines now….

DOW PLUNGES 2% AS WALL STREET TRADERS QUEWE FOR STAR TREK  TICKETS!! 

(Hype – Noise – Noun – Verb – Random Event = Headline).

Finally, do you remember those drawings as a kid where you connected the numbered dots to reveal a picture?  1 to 2 to 3 to ….. 45.  And you had a BEAR drawn!!!  (Picture included for illustrative purposes only – below).

You only had a bear because someone led you to it. Without the numbers, there was any combination of other pictures, or simply a messy ball of string and randomness.  (Which is YOUR narrative?)