Oily predictions

I propose a new business model. Make a seemingly outrageous long-range prediction. It could just be anything, but you might want to stick to the financial world. Once you have decided on the prediction to make, think up of about six possible reasons why this prediction could come true. Given that the prediction in itself is outrageous, it shouldn’t be hard for you to come up with six outrageous reasons to support the same.

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Congress fooled by randomness?

It seems like.

They decided to extrapolate based on one data point – Tejaswini Sriramesh beating Deve Gowda – or there might be another which I can’t recall right now and they came to the wonderful conclusion that the Deve Gowda family will get defeated when faced with women candidates. They even got an astrologer to endorse it. And put up two hapless inexperienced women to take on the ghataanughatis? that are Deve Gowda’s sons.

In vaguely unrelated stuff, I wonder if the results of the elections would have been any different had the order of polling been reversed. The main concern for most voters this time round was a stable single-party government – having learned the lessons from two horrible coalitions in the last four years.

Now, considering the BJP’s performance in North Karnataka, and assuming that the exit polls didn’t do too badly, people in the south and center would’ve realized that voting for the BJP would give them the best chance of producing a stable government. And the BJP would’ve won comfortably, without having to bother about haggling with independents.

And also it seems like the Congress and JDS will try and hijack the independent MLAs and somehow cobble together a slim majority. It’ll be a great tragedy if that happens – especially given that we’ve seen how these two parties have worked together before. As it stands out, I expect the BJP to buy out the three MLAs it needs to form a government.

Dravid might have read Taleb

In yesterday’s post-match ceremony, Ramiz Raja complimented Rahul Dravid for his excellent captaincy. To which Dravid replied “well, I’ve done the same thing that I did in the previous games. Nothing special. You are complimenting me only because we won”. Honest stuff. Rather than simply taking the credit that was offered to him on a platter, he gives what I think is a rational explanation. Rather, I think if he had said “yeah I captained well today so we won” people would’ve said “you lost the last five games because you DIDN’T captain well”. So the way he handled it also helped him take the blame off his captaincy.

Then he goes on to say, “I think luck plays a big part in these games. In every game, you do the same things. Sometimes you win and sometimes you don’t. Today luck was with us so we won” or something to that effect. Read this article by Amit Varma for related stuff..

Where does Nassim Taleb fit into all this? In Fooled by Randomness, he talks about exactly the same problem. I think he uses the example of CEO pay (I’m not sure). And goes on to say exactly what Dravid said – that two people might do exactly the same thing but one guy will turn out to be luckier and he’ll end up being hailed as a significantly better leader. That a small change in luck can have a huge impact on the career

The met department and randomness

Ok. Nothing unusual about the title of this post. There is intuitively a lot of randomness where the met department is concerned. This post is about an editorial in the Business Standard.

Now, the Indian Met department used a new process for forecasting the monsoons last year. Now, this process yielded good results in the north-east and north-west in terms of forecast accuracy. In the center and south, however, it was a disaster. The process had predicted a small shortfall in rain in these two regions, and it turned out the rains here were more than a quarter more than normal!

So what does the met do now? They decide to discard the process for the center and south. And will continue to use it for the north-west and north-east. Even if you know a little bit about randomness and testing, and I assume that the people at the met department should definitely be well-versed in this, you will know that they have done is ridiculous. How can you form an opinion about something by looking at just one data point? Wouldn’t there have been a good chance that this an anomalous result? Now, what will the met do if the method fails for the north-east and north-west also? Will they completely abandon this new method?

I find the system that the met department is using no more intelligent than the one that I use to classify my shirts as “lucky” or “unlucky” (and trust me that isn’t very intelligent; I just use 1/2 data points and quickly derive an opinion).

God help us, if the met department is like this. The sooner weather derivatives (rainfall, temperature, etc.) get launched (or have they already been launched? I know they are now legal in india) the better for us. At least in that case we will get the wisdom of crowds to forecast the monsoon.

Now it’s the turn of the economists

To fear the engineers that is. It seems like TCA Srinivasa Raghavan had an extremely tight deadline with respect to his analysis of the Raghuram Rajan Report. So, instead of taking on the report, he decides to go after the chief author instead. And he doesn’t even do a good job of this. He goes after the chief author’s educational background (Raghuram is a BTech (elec) from IITD). And proceeds to say that the invasion of engineers into economics has in a way ruined the subject.

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Tracking your portfolio

Another amazing insight from fooled by randomness. The essence of this is that if you are a passive investor, the more often you track your portfolio, the more your headache. Suppose you have invested in a portfolio where the expected annual return is R%, and the volatility is V%. The insight is that the more often you track your portfolio, the likelihood of the portfolio delivering a positive return between two observations falls extremely quickly.

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Accountants and Engineers

I’m currently reading Nassim Nicholas Taleb’s Fooled by randomness. Have read some fifty pages so far. Like his later book The Black Swan, this too contains totally awesome fundaes. And contrary to reports that I’ve heard, it’s extremely easy reading. Either it’s because of my familiarity with derivatives or because I’m just coming off Chaos by James Gleick, which I found extremely difficult to read, and struggled to finish.

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