Misleading Statistics

Let me tell you about the perfect investment offer. Each week you will receive a share recommendation from a fund manager, telling you whether the stock’s price will rise or fall over the next week. After ten weeks, if all the recommendations are proved right, then you should be more than willing to hand over your money for investment. After all, there will be just a one-in-a-thousand chance that the result is down to luck.

Alas, this is a well-known scam. The promoter sends out 100,000 e-mails, picking a stock at random. Half the recipients are told that the stock will rise; half that it will fall. ...

This is a problem that has dogged scientists across many disciplines. There is a natural bias in favour of reporting statistically significant results—that a drug cures a disease, for example, or that a chemical causes cancer. Such results are more likely to be published in academic journals and to make the newspaper headlines. But when other scientists try to replicate the results, the link disappears because the initial result was a random outlier. The debunking studies, naturally, tend to be less well reported.

- False Hope, Economist, Feb. 21, 2015, http://www.economist.com/news/finance-and-economics/21644202-most-trading-strategies-are-not-tested-rigorously-enough-false-hope

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