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Probability 101: How Not to Be a Sucker

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  • (1:00) -  Allergic to Algebra? Harnessing Math for Fun & Profit
  • (7:45) -  Probability Skills Immunize Against Those Who Lie with Stats
  • (21:30) - Taleb's Black Swan and the Limits of Standard Deviation
  • (27:10) - Discovering Probability: Where Did It All Start?
  • (36:35) - Expected Value: A Simple Yet Powerful Equation 
  • (41:20) - Crazy People Who Play Powerball: Visualizing The Odds
  • (52:25) - Episode Roundup: Podcast@Zacks.com

Welcome back to Mind Over Money. I’m Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

I have a special interest in helping kids with math. That's because I struggled in high school with algebra and trigonometry, and certainly never made it to calculus.

And my prospects for learning higher math didn't begin to change until I walked onto the trading floors of CME Group (CME - Free Report) and entered the world of financial markets at the age of 29.

I also read books by and about great traders and one message they all had for me was that I needed to learn the basic mechanics of probability.

While equations still intimidated me, it was the stories and games of chance (like poker) that pulled me into math. I went from still being "allergic to algebra" at 28 years old to diving in at 30 and creating a career for myself as an institutional currency trader handling over $100 million per day.

More on my story-based approach to learning math coming up.

And so I spent most of my 30's teaching myself probability and statistics, which are inseparable from some aspects of finance like options pricing and trading.

After I learned about behavioral finance and some aspects of neuroscience, and applied those fields to my studies of "why traders fail," I realized that probability is also inseparable from being a generally intelligent person outside of finance.

I've written much about this over the years and was recently inspired to make a podcast about it after seeing a casual post on Twitter in late August from Maya Sen, Professor of Public Policy at the Harvard Kennedy School...

@Maya_Sen
5:12 AM Aug 26, 2019

Early morning hot take: We would be a lot better off if we taught teenagers basic statistics and causal inference instead of trigonometry

Sen is also the author of Deep Roots: How Slavery Still Shapes Southern Politics.

Her tweet struck a chord with me because whenever I ask myself what would I do with my free time -- and for free -- to help somebody, my answer always revolves around teaching kids science and math.

Then, this Labor Day, I was inspired yet again to get moving on this podcast because I saw a 4-minute video on Twitter about labor unions by economist Robert Reich.

It's a good short lecture from the professor that I recommend to every thinking person who cares about the intersections of politics and economics. In the comments section of my re-tweet, I also post my 5-point reaction to Reich's "5 Big Lies About Unions."

In the podcast attached to this article, I explain a graph that Reich uses comparing data since 1970 for the decline in labor union ranks with the decline in the middle-class share of aggregate US income.

What immediately struck me is that while there is definitely correlation between these two trends, I’m not sure how much causation there is, which seems to be what Reich is implying.

In my view, the causes of both trends are found in the bigger forces that have driven manufacturing jobs overseas, namely technology innovation and free trade -- or what some economists would just label the process of "globalization." And this disruption is happening at faster rates across all industries.

Look at companies changing the world in technology like Apple (AAPL - Free Report) , Amazon, Microsoft and NVIDIA (NVDA - Free Report) , and in medicine like Illumina (ILMN - Free Report) , Gilead, Vertex, and CRISPR Therapeutics (CRSP - Free Report) . The technologies of the 21st century -- machine learning, AI, robotics, immuno-oncology, gene and cell therapies -- will disrupt more companies and careers than anything to do with government policies and labor unions.

They will also continue to create more wealth than just about any previous technological innovation surge, from gold and railroads to crude oil and the military-industrial complex.

Be sure to tune into the podcast to hear me explain my thesis in more detail. Until you do, make a mental note as you watch Reich’s presentation and ask yourself, “Is he playing fair with that chart?”

The Power of Math

When it comes to the fields of economics and politics, there is no shortage of people trying to persuade you with statistics, if not outright deceive you.

And it's easy to be fooled by fancy, colorful charts with crisp, clean labels. But successful deception with slick graphics and internet posts is at least as old as the 1954 book How to Lie with Statistics, by the journalist Darrell Huff.

In presenting an introduction to statistics for the general reader, Huff did not need to be a statistician. He was simply an astute observer of the ways that facts and figures, especially in graphic form, could be used to influence people, even trick them intentionally.

What I did not know about the author of the most famous stats book in history is that he was nearly hired by "big tobacco" to do exactly what he knew so well how to do: lie with stats.

From Wikipedia...

In the 1960s Huff was funded by the tobacco industry to produce a follow-up book titled How to Lie with Smoking Statistics that attempted to use statistical arguments to undermine claims that smoking was harmful to health. The book was never published but Huff has subsequently been criticized by statisticians for his involvement and the arguments advanced in draft copies.

In the podcast, I go on to discuss several other examples where a big industry trade group goes out of their way to fund or promote research and data that are beneficial to their bottom line. These include several examples from “big food” like the dairy and beef industries and the sea-change we have gone through in the past 50 years over whether fat or sugar is the bigger culprit in heart disease.

I also talk about “big energy” and their incentive to promote only that environmental science which absolves fossil fuels from contributing to any greenhouse effects or eventual climate change.

These types of discussions are critical because we need science and math -- and STEM-savvy minds -- more than ever to help us inform decision making from the kitchen table to the board room to Congress.

The Big Short and The Black Swan

This was probably my longest podcast ever at over 45 minutes and in the first half I’m still wrapping up with fascinating ideas and encouragement to get everybody from age 10 to 100 more interested in probability and statistics.

Not only will today’s teens need more data analysis career skills than the generation before as corporations become immersed in oceans of information being generated and processed by machine learning, but they will need this knowledge just to survive the daily onslaught of those trying to persuade them, or deceive them.

We all had a big lesson to learn after the financial crisis of 2007-2008 that nearly sent the economy into a severe collapse. Still, many are doomed to repeat those lessons unless they learn more about financial risk management and leverage.

One gentleman-scholar who has tried to teach us is Nassim Nicholas Taleb, author of The Black Swan. In fact, because that book was published in 2007, he all but warned us that a crisis was quite imminent. I wrote a review of his book in 2008 as the crisis was unfolding and am forever grateful for what I learned about the limitations of standard deviation and the bell curve -- “that great intellectual fraud” -- in modeling the risk of financial instruments and leveraged portfolios on Wall Street. I don’t think any mathematician could have explained it so well.

And we needed someone to explain both the toxic leverage of subprime mortgage derivatives and the phony models valuing them. Thankfully, Michael Lewis was on the job after the crisis to sort out how the housing bubble popped and who the very few winners were in the wreckage.

His 2010 book, The Big Short: Inside the Doomsday Machine, later became the basis for a 2015 film directed by Adam McKay starring Christian Bale, Steve Carell, Ryan Gosling, and Brad Pitt.

I took a look at the film in 2016 and put together a quick synopsis, also tying in Taleb’s prescient warnings. I did this to help anyone understand the financial crisis, especially if they found the film confusing (or annoying).

Here’s the video clip with a short article below it...

The Big Short and The Black Swan

Probability 101: How far can you throw a quarter?

In the second half of the podcast, I share a few quick and fun lessons on probability to get kids from 11 to 111 interested in the math that makes our world go around, from Wall Street to Las Vegas. My first story is about the birth of probability in France over 350 years ago. Understanding that Renaissance tale literally opened up new worlds for me.

Since I struggled with math in high school and college, and now make my living with numbers and equations, I am passionate about helping kids learn how picking up some "quant" skills could be fun and useful for each of them in their own unique way.

Did you know that 75% of high-schoolers graduate below 12th-grade proficiency in math? And it's a shame because everyone can use, appreciate, and be enriched by math if they are only taught in a way that engages and serves them.

I call my approach “story-based math” and I think it could work for millions of kids who aren’t naturally inclined to love math and get scared away from it by intimidating text books and insensitive, static teaching methods.

That's an epidemic I'm fighting to change with dynamic, individualized, interactive story-based math. My vision is to create an entire library of stories and experiential learning that can be accessed through augmented reality and artificial intelligence modules and take any kid on a math and science adventure he or she can customize to their needs and interests and changing pace.

Here’s another video I made over ten years ago to help you see where I've been and where I could go with this project...

How Not to Be a Sucker, Part 1

In the podcast, after some fun with games of chance like the Powerball, I describe a simple thought experiment I designed to get kids imagining how hard it is to win a any lottery.

I call it “How far can you throw a quarter?”

Take a listen and shoot me your comments and questions on Twitter @KevinBCook.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios. In a prior life, he was an institutional currency market maker trading $100 million per day as he provided liquidity to the biggest banks and hedge funds in the world.