Business
The "Evidence Based" Approach is often the Province of Statistically Pseudo-Experts incapable of grasping Absence of Evidence Absence of Evidence Consider the following experiment- John is founder of a hilgly successful web analytic website- and have as baseline 15.000.000 active members as entrpreneurs- aspiring entrepreurs,investors,decision makers – who are using his services. Year one john’s membership web analytic is doing very well- year two the financial heath of the company has shifted from good to better-year three,the profitaility of the company is oustanding. John travel the world and gives seminar about how magnificent and grandiose his company is doing until y year 5or 6 or ,you name it: and then all of of sudden on the 7th year John’s webanalytic company faces a surprise downturn.Only after the facts (when wipeout and out of business),john seem to understand that he was conflating Emergency room for cosmetic surgery- when in reality he was sitting on a ticking time bomb. Now john here is victim of three things First and foremost as CEO John is using the statistical he observes – he makes his inferences and use hinsight as forsesight as direct consequence he doesn’t know he facing something unpredictable than he thinks Second: john is fooled by the law of small number- which implies,we human have a strong tendancy to draw out conlusion very quick on a small amount of data (practical example a 3 year data set canont predict a 10 years flood) Third john is victim of the confimation bias- which nothing more than taking seriously what you see and not taking seriously what you don’t see.After all the dark side of the Moon is difficult to be seen. This by the way happens to a lot of onlines businesses out which are born and die everyday What are the three big take away of this episode.Well I am glad and grateful you ask First thing first,- with the world that has become inceasingly more complexToday therefore,we are more more prone to errors because of complexity due to globalisation and internet.So it is not what you know that makes knowledgeable and rigorous; it is in the type of mistakes that you don't make. Second :John just like many entrepreneurs and decision makers ,investors seem to forget this logical precedence: in order to grow you have to first and foremost to be able to survive( meaning survival, is ability to handle disorder) and talking about growth without concern of fragility is like a builder like studying construction without thinking of collapses Third:No amount of observations of steady earnings can allow the inference that the company is financilally healthy and profitable but the observation of a single upside down spike is sufficient to refute that conclusion-why?simply because volatiliy was compressed and the contribution of risk accumulated coming from jump was inceasing.Which by the way is something you can not observe in this case from the making. Finally the risk consciuos of most experts has not improve at all.This explain why a lot of companies are born and die everyday.