Wednesday, July 23, 2008

The Power of Averages

Some may be familiar with the anecdote of when Sir Francis Galton visited a livestock fair in 1906. While there, he stumbled onto a contest where villagers were to guess the weight of an ox. He found that if he took the average of all the guesses, it came within one pound, even though no one's guess was correct.

All this to say, I am a little disappointed that the average of all the experts didn't quite work out in this situation. I am continually stunned by the fact that so many "experts" were blindsided by the housing and mortgage bubbles.

If you ask me, most were clueless because they were so out of touch with average Americans. If you are working 80 hours a week, and only hang out with like minded individuals (often from the same profession), you have no way of knowing the struggles average people face. As I stated in an earlier post, Wall Street does not know the lives behind the Main Street data. The data can only tell you so much. When things were good, no one felt the need to look beyond the data.

This is where I have always had the upper hand. I'm the type of person who will start chatting you up in line at the supermarket to pass the time. I was also that person in high school who refused to stick with one particular group of friends (the jocks, the ags, the surfers, the goths etc). I have family all over the state in many lines of work (some blue collar, some white collar) and I love to listen to people's stories (which is ironic since I tell mine on a daily basis).

So yes, I have a masters and can analyze data, but I also read columns from various new sources (not just gloom and doom blogs), and listen to what average people have to say. Of course I sometimes get worked up reading the housing bubble blogs, but I try hard to keep an open and objective frame of mind.

2 comments:

Jacob said...

The people guesses about the ox have motivation to make a good guess. There is a prize involved.

Whereas "experts" in housing or financial markets have motivation to paint a rosey picture.

So they pick their "facts" and go out and find statistics to support them.

I have no doubt that most "experts" knew full well that there was going to be a problem. But the checks kepts rolling in so nobody cared.

sacramentia said...

Great Post.

Data is always old news. Good historically but never to be confused with the current reality.