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How To Get Arrested for Fraud (Or Make a Lot of Money)

August 7, 2009

I owe credit to John Allen Paulos for this little idea, though I’m sure it didn’t originate with him. Imagine, if you will, getting a string of letters from a stranger, claiming they can predict the stock market a week in advance. What’s more, for any given stock (it could be ANY stock), this person has made ten accurate predictions in a row, over the course of ten weeks. This stranger sends another letter with a form where you can request information on a specific stock of your choosing for ten more weeks, charging a fee for the process. How much would you be willing to pay?

Let me tell you a little step-by-step guide.

First, you’re going to need a lot of people’s addresses. Due to the sketchiness of the internet and the people who read news papers in print, it’s better if you have mailing addresses. Let’s say you get around 30,000. Now you’re going to craft a nice, neat little letter about how you’re pioneering a new form of stock market analysis tool that you feel is almost completely accurate. Don’t make any demands for money. All you’re going to do is pick a common stock, really any stock though if it’s obscure but recognizable it’s probably the most credible. Now, 15,000 people are going to get a neat letter saying that this stock goes up, while another 15,000 people are going to get a letter that says the stock goes down.

Give it about a week. Check back with the stocks. Whether it went up or down, you now have 15,000 people who can all receive another letter, only slightly different, concerning the said stock. 7,500 people get an ‘Up’ prediction, 7,500 get a ‘Down’ prediction. You know what to do after another week.

In about a fifth of a year, just a few months, you will have a pool of around 30 people who have gotten strange letters in the mail from a guy who claims to have a good statistical tracking method for predicting stocks. What’s more, he’s been right every single time, ten times in a row, 100% success rate with a modest sample size. (For a little math, if it were random flips that could either go up or down, the chance of someone getting 10 heads in a row is about 1 in 1000.) The eleventh letter is now a request for funding, saying that the researcher would be happy to continue sending the letters on a particular stock, or set of stocks, if the receiver would like, for a rather modest fee to know the future.

How much would you be willing to pay?

This isn’t just a clever grift. It’s very easy for people to not see the other side of things, or to have a selection bias about this or that analyst. Imagine the letters were market analysists, constantly getting fired out of a large pool for their wrong predictions. Is it any wonder there are analysts, then, that have a 100% track record with predicting events? Does it mean they actually know anything? This same logic applies to people, like CEOs, successful in their businesses. An excellent string of success can sometimes have no correlation with skill, and the same applies to failure.

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2 Comments leave one →
  1. August 9, 2009 1:36 am

    I find it very hard to believe that an analyst who gets 100% of stock predictions correct would be totally full of horsehockey. For one thing, stocks are not independent of each other, so choosing 10 stocks correctly out of ten may have less to do with random chance and more to do with identifying the variable each of the stocks shares. And second, extending the analogy to CEOs may not work, because unlike the mail fraudster, a CEO cannot choose who pays attention to his bad and good decisions. If he makes a poor decision, it’s public record. A CEO that seems to make the right call 100% of the time probably has, unless I’m missing something.

    I had never thought of this method of fraud before though, thanks for the how-to-guide! 🙂

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