Statistics can be factual while not being facts. They are “truthy.” investors must understand.
In 1982, Harvard biologist, Stephen Jay Gould was diagnosed with abdominal mesothelioma, an incurable and aggressive cancer. The median life expectancy from diagnosis was eight months. He was familiar with statistics and statistical ideas and asked, “What does ‘median mortality of eight months’ signify in our vernacular?”
What he learned helped him defeat the cancer. He died in 2002 of unrelated causes. Read his essay from 1985 “The Median Isn’t The Message.”
The same message applies to investors.
Most investors understand the method of calculation, but they fail to fully see the meaning. Unlike Gould, that likely won’t kill them but it will imperil their fortune. Gould makes several points that resonate:
- “Platonic heritage, with its emphasis on clear distinctions and separated immutable entities, leads us to view statistical measures of central tendency wrongly, indeed opposite to the appropriate interpretation in our actual world of variation, shadings, and continue. ” Platonic logic requires that there be a true and a false. Living or dead. It does not account well for the space between. We use averages and variation as a surrogate for that knowledge.
- “we view means and medians as the hard “realities,” and the variation that permits their calculation as a set of transient and imperfect measurements of this hidden essence. ”
We seldom do well when we replace a real event or set of events with an icon. Neither mean nor median tell us much about the fabric of the underlying information. The truth is more difficult to find and when found, more difficult still to accept.
- “Variation itself is nature’s only irreducible essence. Variation is the hard reality, not a set of imperfect measures for a central tendency”
We don’t like variability. We like the ability to predict, but the variability is what is real, the means and medians and standard deviations are the artifacts. The symbols, not the reality. We make weaker decisions when we ignore reality.
Studying variability does not help much. In the stock market it is noise driven by the emotions and needs of the people transacting business today. Those are not easily analyzed. Variability is always present and it must be absorbed into our strategic vision. As Buffett says, “It’s a terrible mistake to pay attention to those bobs ups and downs, because you will drive yourself crazy if you do so and become an inferior investor”
Statistical information is useful in that it can point to tendencies, but that is not the place to stop. It is important for each of use to learn what statistics are and how they are created, but it is crucial to learn ways to assess what they mean.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.