Comments on: Mean ignorant monkeys vs median jumping clowns http://equity-research.com/mean-ignorant-monkeys-vs-median-jumping-clowns/ Articles, news, careers and forum for the equity research community Mon, 26 Jul 2010 13:24:02 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Corey Rosen http://equity-research.com/mean-ignorant-monkeys-vs-median-jumping-clowns/comment-page-1/#comment-178 Corey Rosen Fri, 15 May 2009 19:15:56 +0000 http://equity-research.com/?p=76#comment-178 Finally, someone is making this point. I don't get it. Take any statistics course, and the first ting you learn is mean, mode, and median. It doesn't take a Ph.D. to figure out that if you have a distribution pattern in which there is an absolute bottom (stocks cannot go below zero) and no absolute top, the median almost invariably must lag the mean. Yet, as you say, somehow trillions are ventured on the supposition that somehow it won't, at least for you. The same logic of assymetric return possibilities you illustrate so well here points to a problem with executive pay being based largely on massive option grants. They also have a downside of zero but an unlimited upside. So it makes sense to take outsized risks (if this doesn't work, I lose some opportunity cost, but no actual cash; if it does I can become very, very rich indeed). I suppose the explanation ultimately is we live in a Lake Wobegon world where most of us think we are smarter than average (70% of people surveyed at work say they are in the top 10% of performers). Of course, if it were true, it wouldn't be true anymore. Finally, someone is making this point. I don’t get it. Take any statistics course, and the first ting you learn is mean, mode, and median. It doesn’t take a Ph.D. to figure out that if you have a distribution pattern in which there is an absolute bottom (stocks cannot go below zero) and no absolute top, the median almost invariably must lag the mean. Yet, as you say, somehow trillions are ventured on the supposition that somehow it won’t, at least for you.

The same logic of assymetric return possibilities you illustrate so well here points to a problem with executive pay being based largely on massive option grants. They also have a downside of zero but an unlimited upside. So it makes sense to take outsized risks (if this doesn’t work, I lose some opportunity cost, but no actual cash; if it does I can become very, very rich indeed).

I suppose the explanation ultimately is we live in a Lake Wobegon world where most of us think we are smarter than average (70% of people surveyed at work say they are in the top 10% of performers). Of course, if it were true, it wouldn’t be true anymore.

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