reading review - seeking wisdom, riff offs (encore)

OK, back on the stage for one last riff - I hope this clears up the last thought I shared on Thursday:

11c) Let’s say someone ID’s one of two colors with 80% success. If the color exists in 10% of the population, the other color is misidentified in 18% of total IDs. So how sure can we be it's the minority based on an identification? Around 31%.

This asks something like - was the car you saw blue or green? - and sets a condition that there is a 20% chance of identification error (I say blue when it was green). Further, if green is seen in only 10% of the total of all cars added together, then we know 2% of green answers are incorrect; green is incorrectly called blue 18% of the time.

If you write it out, it looks like this:

• Blue car is correct answer - 72%
• Blue car is incorrect answer - 2%
• Green car is correct answer - 8%
• Green car is incorrect answer - 18%

So if you add up the percentages and take the proportion, you get the odds of each answer being correct:

• Probability blue is correct: 72/74 = 97.3%
• Probability blue is incorrect: 2/74 = 2.7%
• Probability green is correct: 8/26 = 30.8%
• Probability green is incorrect: 18/26 = 69.2%

In other words, if someone says they saw the less frequently seen car, it only takes a small identification error rate before the answer becomes more than 50% likely to be incorrect.

reading review - seeking wisdom, riff-off (crunching numbers)

Howdy! Let's finish up with some more scattered observations from Peter Bevelin's Seeking Wisdom.

8) Just saying ‘four out of five’ says nothing. So from all, or just a sample of five?

We've gotten dangerously accustomed to talking about results from surveys or studies as if they automatically represent some kind of truth. It wouldn't be such an issue if these results never strayed from the trivial or mundane - four out of five Americans put on their left sock first! - but unfortunately the results are often about more important questions, forcing us in the audience to remain skeptical until we can confirm the validity of the methodology.

9) Roulette wheels have been shown to pull in a profit even without a house edge. Players tend to pull back bets during a bad run, or stick with a double down strategy long after the returns have slowed.

Comments like this reinforce my skepticism about amateur statistical analysis (or maybe I'm just annoyed at the low standards for 'thinking' about roulette wheels). I'm sure someone somewhere watched real gamblers at a real roulette board and observed this strange phenomenon ("have been shown"). The link to betting behavior rings true; the stock market is my star witness.

But here's the thing - every single bet made on a roulette board favors the house. No exceptions. This is the only relevant reason why roulette wheels profit in the sense that no matter what else happens at the wheel, the house retains the probability edge. Could the house win without this built-in advantage? Possibly. But I think bettors would wise up, and the house would respond. If you disagree, sit at a blackjack table and openly count cards.

10a) Just enrolling low-performing students into a remedial course can bias toward ‘good results’ via regression to the mean.

10b) The body is great at healing itself, so many treatments will look effective just by leveraging the high base rate of natural success.

These subtleties of statistical behavior likely wouldn't be met with a standing ovation from the education or medical fields. But let's say you take one hundred equally capable students, then grade their semester performance on the standard 'curve'. Just by pure chance - by which I mean, factors unrelated to underlying academic ability - you'd have five percent of those students earn a failing grade. If you put them in a remedial course, each student has at least a 95% chance of doing better. For some reason, people use these results to conclude that remedial coursework has value.

The medical field has a very strong grasp of this idea but seems resigned to an obvious counterpoint - what else can we do? Fluids and bed rest are almost always a great idea, but insurance won't cover it, which means doctors aren't reimbursed for good advice; I always appreciate the online resources that demarcate symptoms into 'continue monitoring' and 'go to the hospital' categories.

11a) In the context of certain events like a large earthquake, probabilities are a distraction. In geology such an event is inevitable, and a better strategy would be to encourage anyone in the area to be fully prepared.

11b) Forensic evidence alone will produce false positives. Let’s say a city has a 500K population, with false matches in 1/20000 tests. If there is 1 sick person, that means the infected party plus 25 test positive - so any match is a 1/26 chance of being sick.

I like these quips because understanding them is the best way to demonstrate mastery of applied probability. The earthquake example is an easy starting point, reminding us that certain events occur at magnitudes that make estimating frequencies an inappropriate mode of thinking. The next is more mathematically challenging but critical; a high school student who understood it would have no immediate need for additional probability coursework (probably).

12) I've exposed your lies, baby, the underneath no big surprise...

If there's one thing to keep in mind, it's that the deceit of statistical thinking is often only just out of sight. Lift every rock, but don't be surprised when you see that, hiding all along...

...OK, fine.

That's not from this book, that's from Muse's 'Plug In Baby'. But we need to end a riff-off somewhere, and I'm out of Courtney Barnett songs. So what better way than Muse?

Thanks for reading.

reading review - seeking wisdom, riff-off

Let's have a second look at Peter Bevelin's Seeking Wisdom, focusing on specific ideas from his work.

1a) Praise changes behavior, criticism does not - emphasize what is going well.

1b) Appealing to interest almost always works - for example, why do something unethical, since it exposes you to blackmail?

1c) Paying people for a shift and sending them home when the work is done is the best incentive for prompt and accurate work.

Psychology is always lurking in this book and one of its main applications is to motivation. I don't believe in the partnership of carrots and sticks (most carrots are basically sticks anyway) so the above thought helpfully clarifies the orange approach. However, from my experience many people simply don't respond to feedback, preferring instead to make inevitable errors, then 'learning from mistakes'. Why is this such a popular method? Do sailors learn by sinking their own battleships? Self-interest and clear incentives are buoyant tools when directing a deluded skipper.

The third quote was based on a particularly memorable anecdote about shift workers - no matter what the boss did, the work always expanded to fill the allotted time. One day, the boss declared - the shift ends when the work is done. Again, motivation using self-interest, delivered via the clearest of incentives, and in this case enough to ensure an efficient shift.

2a) Humans excel at interpreting new information such that all prior interpretations remain intact.

2b) A good place to put armor is where the bullets did not hit - everyone else hit by those bullets likely didn’t make it back.

The subtlety in the above pair is that when the vehicle returns to the base, the temptation is feel good about the success - they made it home because the armor protected them. The failure to consider those who perished means more of the same, ensuring that the next round of casualties will have been entirely preventable.

3) A great lesson in education is knowing how to do something when it needs to be done, whether you like to do it or not.

This type of 'insight' is a possible way to measure privilege; someone whose life is defined by want and necessity will not derive this great lesson from having to complete a problem set in the wee hours of the morning.

4a) Never ignore a subset of information just because it’s not easily or clearly counted as the rest. Try to be roughly right, not precisely wrong.

4b) An inferior option makes a relatable but superior option more attractive. For example, most people choose money over a fancy pen, but some switch to a fancy pen if a bland pen is added to the original choices.

This picks up on a point I made in the original reading review. The specific example builds on a finding that people overvalue options if it wins in a direct comparison to a similar choice. If you offer someone a fancy pen or money, they choose differently than if the choices included a third option, the bland pen. If you want to be roughly right when choosing among many options, perhaps one way is to narrow the decision to two options, and then proceed as if those earlier options were never part of the equation.

5a) EBITDA is odd because it suggests depreciation is not an expense, that it is a non-cash charge. It’s merely unattractive because you pay before the return, and therefore the returns in the future represent accounting gymnastics.

5b) Cost reductions alone aren’t important, it’s also a question of whether you recognize the benefits of those cost reductions.

Frankly, I only barely understand topics like EBITDA from reading about the balance sheets of soccer clubs, a topic thoroughly covered by The Swiss Ramble (who is now exclusively on Twitter - here's a not very illuminating example that mentions EBITDA). The larger point is good enough for now - the accounting maneuvers are always fun so long as you can support the business with cash flow. Otherwise, it quickly becomes like a river just gone dry; you suddenly see all the crap that inflated the water level.

The cost reductions get to the same idea. Again, on the surface it's always a great idea to reduce costs, but a reduced cost is in itself no automatic benefit. If the immediate benefit isn't obvious, the money is either going into an investment (which will take time to pay off) or to the profit margin (which means it might disappear into ownership's personal bank accounts).

6a) One way to evaluate a stock is to consider the whole thing, then translate the overall business into a pretax revenue amount that equates to your desired rate of return. OK, you value it at $500B, and you want a 10% return… if you must wait a year, that means $80B a year pretax… how many such businesses exist?

6b) Stocks have value because of dividends, not earnings. Earnings are a means to the end, either paid out in dividends or reinvested to produce dividends later. To justify putting down cash now, an asset must return cash later.

I think people create a great deal of confusion for themselves when they think of stocks as something resembling ownership in a company. Sure, there are enough parallels to make it true, but the bottom line is that unless you buy a majority of the shares stock ownership is little more than a right to future earnings. So instead of asking whether you want to 'own' part of the company, ask - can I get a dividend out of this stock asset?

7) Economists do well to ask ‘then what?’ If we trade away future claims on our output, then others have to invest in us.

I was trying to think up a colorful analogy for international trade, and this is what I got: it's like two guys standing face-to-face, each with a handful of the other guy's you-know-whats. They have two options: (1) twist or (2) let go. But here's the catch, or twist - if one guy lets go, the other guy will immediately twist. So what do you think will happen? At the very least, they'll invest enough into the situation so that no one suddenly becomes interested twisting, or letting go.

I've otherwise written enough about this topic - I mean both 'then what', and also Seeking Wisdom. Not sure if I've written enough about My Analogy for #7, but let's say it's enough for now, so I'll, er... let you go. Anyway, we'll finish up with part two next week.

reading review - seeking wisdom

Bevelin's incredible work, a compilation of seemingly every piece of wisdom he's ever come across, would have changed my life if I had read it a few years ago; I'm on nodding terms with such books these days. This book is remarkable just for its density. I suppose an easy criticism is to suggest that reading the original sources of these insights might prove more beneficial, but such a dismissal ignores that ingesting Seeking Wisdom instead saves hundreds of hours.

Seeking Wisdom by Peter Bevelin (May 2020)

To expand on the above point, it's an example of opportunity cost, the idea that the best way to value a decision is to compare it against the next best alternative. These sorts of intellectual, academic ideas are covered in exhausting detail over just three hundred pages - applications of the prisoner's dilemma, why relative frequencies influence better than probabilities, or the importance of base rates. Those who want the ten minute version can follow this link to my notes.

The book presents an early insight that serves almost as its mission statement - the best way to achieve wisdom is to master what other people have already figured out. I don't like this thought much - as longtime readers may recall, I have my own definition for wisdom: wisdom is knowing when your experience is relevant. Bevelin is fully in charge of the intellectual relevance of his experiences, as demonstrated by this book, a collection rather than invention; the critical next step is recognizing in his own life those moments where by standing on the shoulders of Munger and Darwin, he has seen beyond where their eyes only saw horizons.

There is so much in this book that I fear going on and on would merely restate the work; my notes above might prove a decent compromise, as could be this extended review and analysis of the book. I am even considering an old-school TOA riff-off, and I do not make that threat lightly. For now, let's close with a thought that has lingered with me over the past couple of months - better roughly right than precisely wrong. Seeking Wisdom explores many ways to apply the idea - for example, increase system efficiency by employing trustworthy people instead of worrying about every little mechanical detail. Bevelin also explores a mathematical angle to the idea, noting that analysis carried out to a third decimal place - often with the help of lawyers, accountants, and consultants - suggest a complexity that should make anyone wary about reaching a clear conclusion. Another way to think of this is that it's easier to multiply by 3 rather than by Pi - not only does it simplify the math, it also forces us to admit that we merely estimating.