Whether it is the stock market, horse racing, or Sunday’s NFL match-ups, touts and tips are plentiful. Buy this sleeper of a stock, bet on a longshot that is sitting on a big race, or take the Bears and the points. Email has empowered con artists among the analysts/prognosticators to leverage the math in their favor.
The bestselling book How Not to Be Wrong, the Power of Mathematical Thinking (by Jordan Ellenberg) lives up to its billing as “The Freakonomics of math” and in one chapter it addresses the math behind unsolicited mass touting of stocks and horses.
Dr. Ellenberg (Distinguished Professor, University of Wisconsin) explains the pre-Internet parable of the “Baltimore Stockbroker.” This devious broker mails a paper newsletter to 10,240 recipients predicting that a certain stock will either rise or fall in the following week. He sends the newsletter for 10 consecutive weeks and is correct in his prediction every week. On the eleventh week, he asks recipients to invest money with him based on his shrewd prescience in selecting stocks to buy or short.
The odds of the Baltimore stockbroker being correct 10 weeks in a row are 1/1024 or 0.00098 (1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2 x 1/2). How did he defy such long odds?
On week 1, he sent the newsletter to 10,240 recipients; half were told the stock would rise in the coming week and half were informed the opposite. In week 2, the newsletter went only to the 5,120 people who got the correct prediction the previous week. This winnowing process continued until, after the final newsletter, only 10 people were left who had received a correct prediction every time. Some of them undoubtedly thought the stockbroker was a seer and were likely to rush to “invest.”
Dr. Ellenberg says a stunt from a British reality TV show is the closest real-world example he found of the Baltimore stockbroker parable. Magician Derren Brown mailed sundry horse-racing selections to thousands of Britions and kept doing so until, ultimately, one person was left that believed Brown had “devised a foolproof prediction system.” Click here for a link to a website that explains the Brown illusion in detail.
Plenty of experts are adept in picking stocks to buy and sell or horses to bet on or avoid. None of them are likely to be mass mailing unsolicited free selections week after week and none of them are perfect in identifying winners.
In the era when newsletters went out in stamped envelopes there was a real monetary cost involved. In the age of email, countless people can be reached at virtually no cost. This is a modus operandi made to order for touts employing the Baltimore stockbroker scheme to provide tips on stocks or horses, or anything…in order to prey on gullible people.
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