by Geoff Olson
A friend recently expressed disappointment in his stock market portfolio. It hadn’t performed appreciably better than chance over a significant stretch of time, he told me.
Welcome to the world of chance.
If you take 300 students, ask them to correctly call 10 coin toss flips and graph the results, the result is a nice, fat bell curve, visually representing correct versus incorrect guesses. With the above result in mind, financial researchers tabulated the performance of 300 mutual fund managers for a 10 year period, from 1987 to 1996.
“In this case, the horizontal axis represents not correct guesses of coin flips but the number of years (out of 10) that a manager performed above the group average,” observed physicist Leonard Mlodinow in his 2008 book The Drunkard’s Walk: How Randomness Rules Our Lives. The result: a nice, fat bell curve that sits snugly over the graph from 300 students tossing coins 10 times.
In other words, if you’re seeking the best among financial advisers, you might as well stick some names on a dart board. Worse yet, Mlodinow notes that in a study of 153 financial newsletters, a researcher at the Harvard Institute of Economic Research found “no significant evidence of stock-picking ability.”
For centuries, human beings have sought predictable outcomes through divination, witchcraft, prayer, political ideologies, marketing systems, financial speculation, and scientific models. Our kludged nervous systems have taken our species from the savannah to the space station in a geological blink of the eye. But our gift of pattern detection can run gently amok at times.
For example, if you dump a bunch of coloured jellybeans into a glass jar and shake them, you will see a pattern on the inside wall of the jar traced by contiguous jelly beans of the same colour. This perceptual glitch usually isn’t problematic, unless emotional processing from the brains limbic system kicks in. Hence the occasional reports from the American South of Christ’s face on toast, windowpanes and barn doors.
Consider that bane of our best-laid plans, the weather. On its website, Environment Canada attaches a probability figure to its predictions. However, long-range predictions come the proviso that some “results are not significantly better than chance.”
“It’s like saying flip a coin, throw a dart,” explained senior climatologist David Phillips in the 2012 CBC documentary, The Trouble With Experts. “We have to say something; we can’t just sort of put a blank map saying the weather this month has been cancelled, so the best way to communicate is to give something but then say ‘user beware.’”
Weather is one thing; wine is something else entirely. Researchers have long known that the average oenophile is hopeless at judging wine quality.
Now it turns out that wine experts are also largely without a clue.
Vintner and oceanographer Robert Hodgson regularly selects the best wines from his small California winery to enter into local competitions. He began to wonder why the results were so inconsistent over time for different brands. Drawing on his experience in statistics, he organized an experiment at the California State Fair wine competition.
He found through his label-concealed taste tests that accomplished palates are no better than untutored tongues. “The results are disturbing,” Hodgson told The Observer in 2013. “Only about 10 per year of judges are consistent and those judges who were consistent one year were ordinary the next year.”
It’s not the wine that’s wonky. It’s the linkage between our ancient olfactory sense and a linguistic faculty that is evolutionarily recent. Pompous wine-trade descriptors (“wet stone,” “spring hedgerows” and “nervy” for example) are verbal camouflage used by wine snobs to disguise an inability to communicate their own subjective states. You might even say they’re full of shiraz. (In 2007, Princeton economics professor Richard E. Quandt created an algorithm to generate impressive-sounding reviews of imaginary wines, employing his “vocabulary of bullshit.”)
Inaccurate or fictitious assessments of wine, weather and stock funds are hardly enough on their own to take our species over the cliff. But when it comes to other areas of high complexity — economics, neuroscience, artificial intelligence, geopolitics, and climate science — experts would do the rest of us a favour by looking out for the jellybean factor in their own assessments.
The Vancouver Courier, Jan. 23