Posted by
Hemos
on from the fun-with-company-start-ups dept.
dav writes: "Fortune is running an
article
which provides an inside narrative on the trials of the infamous encryption software company
TriStrata. Featuring venture capitalist follies, Bruce Schneier, International CEO hopping and more. "
I'll admit that I did not actually read the article very carefully... mostly because my first reaction was so strongly "So what!"
As far as I can tell, the story is that some guy said that he wanted to invest in X, wound up investing in Y; X made a bunch of money and Y lost money... and the guy has sour grapes (but still wants to toot his own horn). Of course, some *other* investor *did* invest in Priceline, and now they want to convince you they have a crystal ball into the "new economy".
Y'know I *could have* invested in VA Linux the day of the IPO, and made a zillion dollars. In fact, I even mentioned to a couple friends that I thought it was worth watching... but in real life, I didn't buy that, and I'm no more precient than the next guy.
Actually, it's kinda like the birthday paradox, and other cognitive limits that people seem to suffer about large numbers, groups, and probabilities.
Here's two related examples. I was having a talk recently where these came up. Someone suggested that I should play one of those "online investment games"; the idea of such is that each "player" gets a certain amount of make-believe money, and for a certain time each player makes imaginary stock trades. At the end of a period of time, the player with the most make-believe money "wins". Of course, what they win isn't all the real money, but just gloating rights... or maybe in a few cases a token prize like some free trades on an online brokerage that sponsors the game.
My observation is that it will *ALWAYS* be an extremely high-risk investor who wins these contests. The reason is simple. Say 100 players join the contest. 20 of those might take extremely high-risk strategies. The other 80 take comparatively low-risk strategies. Of the 20 high-riskers, 19 do worse than the overall average, probably half of them actually wind up losing (make-believe) money. But still, one of the high-risk choices proves right. At the end of the "game" the winner is always a high-risk players... but the "winningness" of a high-risk strategy is still probably less than that of a low-risk one. The result of the game really doesn't show you anything about what is best to do with real money... although a lot of people will be lulled into thinking it does.
My conversant pointed out a old scam related to this principle. Here's the scam (don't actually do it, it's illegal and wrong... but it does show the way people misunderstand the groups they belong to and their probabilities). (e)Mail a predication to a sufficiently large group of people. Could be a stock pick, could be a racetrack result, something where picking the right answer could actually make money. But don't mail the same prediction to the whole group, instead split the prediction by subgroups. For simplicity, say your group is 4096 people (easy with all those spam email lists), and your prediction is just Stock X goes up or Stock X goes down. You've just emailed 2048 people the wrong predication, and they think you're an idiot. OK, fine. Now take the 2048 people you "predicted" the right thing for, and repeat the procedure: 1024 get one prediction, the other 1024 get the opposite. Same thing again. Whittle down as you go.
Now let's say you do ten runs of this. The remaining 4 people have just seen you make an accurate prediction *TEN* times in a row. That's quite a record for something hard to predict, no?! Now you need a story about your secret method that outwits the economists/horse-racers/whatever, and is sure to keep picking the right results. But sadly, all your money is tied up right now in blah-blah-blah (all the winnings from the previous rounds). So you really just need some people to invest in your next round of prediction, and you will take only a small cut of the big winnings.
Now take the money and disappear. Hope the cops don't catch you. People want to believe certain things, especially when it's a way to get money for nothing (you should see me filtered-spam archive with hundreds of similar offers... or look at your own INBOX, most likely). And surely anyone who can make *TEN* successful predictions without fail must be on to *something*.
In other words, a stopped clock is right twice a day.
Slashdot Mirror
I'll admit that I did not actually read the article very carefully... mostly because my first reaction was so strongly "So what!"
As far as I can tell, the story is that some guy said that he wanted to invest in X, wound up investing in Y; X made a bunch of money and Y lost money... and the guy has sour grapes (but still wants to toot his own horn). Of course, some *other* investor *did* invest in Priceline, and now they want to convince you they have a crystal ball into the "new economy".
Y'know I *could have* invested in VA Linux the day of the IPO, and made a zillion dollars. In fact, I even mentioned to a couple friends that I thought it was worth watching... but in real life, I didn't buy that, and I'm no more precient than the next guy.
Actually, it's kinda like the birthday paradox, and other cognitive limits that people seem to suffer about large numbers, groups, and probabilities.
Here's two related examples. I was having a talk recently where these came up. Someone suggested that I should play one of those "online investment games"; the idea of such is that each "player" gets a certain amount of make-believe money, and for a certain time each player makes imaginary stock trades. At the end of a period of time, the player with the most make-believe money "wins". Of course, what they win isn't all the real money, but just gloating rights... or maybe in a few cases a token prize like some free trades on an online brokerage that sponsors the game.
My observation is that it will *ALWAYS* be an extremely high-risk investor who wins these contests. The reason is simple. Say 100 players join the contest. 20 of those might take extremely high-risk strategies. The other 80 take comparatively low-risk strategies. Of the 20 high-riskers, 19 do worse than the overall average, probably half of them actually wind up losing (make-believe) money. But still, one of the high-risk choices proves right. At the end of the "game" the winner is always a high-risk players... but the "winningness" of a high-risk strategy is still probably less than that of a low-risk one. The result of the game really doesn't show you anything about what is best to do with real money... although a lot of people will be lulled into thinking it does.
My conversant pointed out a old scam related to this principle. Here's the scam (don't actually do it, it's illegal and wrong... but it does show the way people misunderstand the groups they belong to and their probabilities). (e)Mail a predication to a sufficiently large group of people. Could be a stock pick, could be a racetrack result, something where picking the right answer could actually make money. But don't mail the same prediction to the whole group, instead split the prediction by subgroups. For simplicity, say your group is 4096 people (easy with all those spam email lists), and your prediction is just Stock X goes up or Stock X goes down. You've just emailed 2048 people the wrong predication, and they think you're an idiot. OK, fine. Now take the 2048 people you "predicted" the right thing for, and repeat the procedure: 1024 get one prediction, the other 1024 get the opposite. Same thing again. Whittle down as you go.
Now let's say you do ten runs of this. The remaining 4 people have just seen you make an accurate prediction *TEN* times in a row. That's quite a record for something hard to predict, no?! Now you need a story about your secret method that outwits the economists/horse-racers/whatever, and is sure to keep picking the right results. But sadly, all your money is tied up right now in blah-blah-blah (all the winnings from the previous rounds). So you really just need some people to invest in your next round of prediction, and you will take only a small cut of the big winnings.
Now take the money and disappear. Hope the cops don't catch you. People want to believe certain things, especially when it's a way to get money for nothing (you should see me filtered-spam archive with hundreds of similar offers... or look at your own INBOX, most likely). And surely anyone who can make *TEN* successful predictions without fail must be on to *something*.
In other words, a stopped clock is right twice a day.
Buy Text Processing in Python
Interesting analysis. And the central servers which had to be secure were running NT...