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A Little Happier: How Did This Stockbroker Make So Many Accurate Predictions?

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Recently, in Daniel Levitin’s fascinating book The Organized Mind, I read an explanation for how a particular kind of scam is organized. I do love reading about scams and how they’re set up.

This scam is a great illustration of the fact that we think we have a clear view of what’s happening, but in fact, if we step back to see the bigger picture, things often look very different.

Imagine that a stockbroker sends you an unsolicited letter. It says, “I’m an expert at predicting the stock market. I want to prove myself to you. Over the next six months, I'll make predictions about how the market will move. At any time, you can ask me to stop sending letters—or I’ll take you on as a client and make you rich. My first prediction is…IBM goes up. I’ll send another letter in four weeks.”

And--you guessed it--the prediction comes true.

Another letter arrives, with another market prediction that turns out to be correct.

And this continues six times in a row! What would you think?

This scam actually occurred, many people actually gave this person money, and the broker was imprisoned for fraud.

How did he do it?

At the beginning, he sent out two sets of letters—1,000 letters that said “IBM goes up,” 1,000 that said “IBM goes down.” At the end of the month, when he knows what happened, he mails letters to the people who got the correct prediction, again, half and half. After six iterations, he has a group of 31 people who saw six correct predictions in a row.

To them, looking at the letters, his judgment seemed infallible. But when we see the larger pattern, we understand how the scam works.

I find this example a great reminder of how hard it is to know what I don’t know.

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