A Classic Scam

branching tree

There is an old scam that is useful to look at because it’s illustrative of a way in which people can easily be fooled.

The scam works like this.  You get a message telling you that a particular stock is going to go up over the next week (or, perhaps, that a particular sports team will win), or the message might say that the stock will go down (or the other team will win). You don’t think much of it, but at the end of the week you notice that the stock has gone up (or down) exactly as the message said.

The next week you get another message of the same nature, predicting a particular stock to go up/down (or sports team…well, you get the idea).  And again, sure enough… The following week the same.  And then the week after.

Finally, after a number of weeks with every single prediction correct, you get a message saying that now that they’ve established that they can reliably predict these things for just the low, low, low price of (some value) they’ll tell you how to do it.  You’re very excited about the idea of being able to safely invest (or “gamble” in the case of the sports teams) and make lots of money with very little effort.  So you send in the money and…never hear from them again.

Many of you, cued in by the image at the top there, have likely already figured out how this scam works.  The scammer starts by sending out a large number of messages.  In half of them they say the stock will go up (or team A will win).  In the other half, they say that the stock will go down (team B win).  Then, whatever happens, they’ve got a large number of people, half of those they sent to, where what they predicted is what happened.  To those people, and only those people, they send the next message.  Again, half of them get the “stock will go up” and half “stock will go down.”  And the week after, they send messages to the ones where they were right twice in a row.

Each time, only half the people get messages, but since they started with a large number they still have plenty.  After a number of repeats where people, not seeing all the “wrong” predictions, have gotten a perfect record of correct predictions, come to believe that the person making the predictions has some secret knowledge and are willing to pay to get it.  Only there is no secret knowledge.  There’s just a limited number of possible outcomes, and filtering out from large numbers of “samples” only those that fit the outcome they want.

This is a rather simplistic illustration of a general principle by which people are prone to fooling others, or even themselves.  When a politician lists a bunch of good things that happens under his authority, or a bunch of bad things that happened under an opponent, it’s easy to portray those things as happening because of the politician’s policies.

The world, however, is a complicated place.  There are always “good things” happening and there are always “bad things” happening.  You can make even the most disastrous policies look good by simply listing the “good things” and ignoring the “bad things.” Conversely, you can make the best policies look bad by doing the reverse.

You have to look deeper than “these things happened, therefore…”.  This often requires a level of understanding that most people do not have.  This is no criticism of those people.  As I said, the world is a complicated place, no one has sufficient understanding of enough varied fields along with access to sufficiently comprehensive data to fully understand it.  Indeed, that’s one of my main criticisms of any attempt at centrally planned economies.  But one needs to be aware of the problem and skeptical of arguments that simply list good/bad things that happened and then simply declare it was because of this or that policy.

You should always ask yourself, and check, whether the “facts” being claimed are true, but you need to go beyond that.  You need to look for whether the facts actually have a causal connection to the claims being made, and still further to whether there are additional facts that might counter the claims.

The real world is complicated and simple answers are rarely correct and almost never complete.

One thought on “A Classic Scam”

  1. While I agree with your post I would just like to point out, ALWAYS BET ON THE BISON! NDSU (FCS) is not only the winningest college football team of the last decade going 137-13 (.913) and winning 8 national championships in the 2010s. The next best is Alabama in the FBS 124-15 (.892) Even more astonishing is that they are the only team with a winning record during that time when trailing at some point in the 4th quarter. They are 17-12 (.586) when trailing in the 4th quarter. The next best? Alabama at 11-14 for a .440 winning percentage.

    Like

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