Saturday, October 10, 2009

The Law of Averages

There are many people in the opinion business who go to "the Law of Averages" to back up a theory that they are presenting far too often. This belief that because something has not happened for a few successive occurrences, that it is now more likely to happen. Don Taylor on the TEAM 1040 in Vancouver is one of the worst I know when it comes to overuse of a "law" that is not true. How did it ever become a law? Taylor will say "the Lions have lost three in a row; based on the law of averages I believe that they will win tonight." What the hell? If I flip a coin repeatedly and it flips heads 3 times in a row, the odds of the next flip being anything is 50-50. It does not increase the probability that the event will occur. The probability of flipping three heads in a row is 12.5%. But once the second flip has occurred, the odds of the next flip is 50-50. This is how Casinos bleed people at roulette.

To those of you playing "Forex" at home, be aware of this flaw in behavioral judgement of gamblers. Most investors are educated gamblers with varrying risk premiums. Do you know what the mathematical term is for the "law of averages"? None other than "the gambler's fallacy" Donny. Vegas exploits this misconception to the tune of billions of dollars annually. Shall we call it "the fallacy of averages"?

I don't know how else to explain it to you people. I don’t know if Don Taylor has said it much in the past couple of months. I stopped listening to the Team 1040 in the summer because I got sick and tired of all the CFL. Look, any league where 90% of the teams make the playoffs is not a professional league. I care about the CFL about as much as I care about the ECHL. As I said to some European soccer fans on the golf course today, “I only take my football American”. I do miss Ray Ferraro. He is in my top two for favourite hockey opinionist. I trust Ferraro implicitly on hockey opinion. If Ferraro says it, it has to be true. If Don Cherry ever retires, Ferraro will be my go to guy. He just lacks the “pizzazz” of the Don. I doubt Cherry will ever truly be replaced when he exits the spotlight.

That's all I have to say about that. I just wanted to be on the record with an opinion about the "law of averages"...

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