On Randomness

It is human nature to attach meaning to randomness. So, it is often believed that someone who has had several years of investment success, for example, is more skillful than others with less success. However, it is quite likely that it is instead a lucky streak.

There is an excellent experiment, actually a magician’s trick, whereby people are asked to toss a coin 30 times and write down the results. Then, the magician has a single person make up the results of 30 tosses and write them down. The magician succeeds in picking the fake results every time.

This is because people know that the odds of heads or tails are 50/50, but don’t take account of “streaks’, which are very common. In the real tosses streaks, of say 5 heads in a row, are common. However, in the fake toss streaks are much less common and much shorter. Say 2-3 heads in a row.

In finance, someone with a few years of outperformance may be employed at a very high cost because that outperformance is expected to continue. Sometimes it does, but often it doesn’t.

I have written about the randomness of the world previously, it is much more, perhaps depressingly, widespread than most people think. Read more here, including details on two excellent books on the subject.

You need luck to win in the investment space, in fact a lucky streak. But with outside influence, such as from government, anything is possible. That is another story