1. Illusions of Patterns and Patterns of Illusion
GROUP 1
Celestine
Walter
Jun Yue (Presenter)

2. OUTLINE Illusions – human perception
Causes
Effects
Randomness in the financial market
Hot-hand fallacy
Bill Miller
Clash between human need to feel in control and ability to recognise randomness

3. WHAT YOU SEE MAY NOT BE WHAT IT ACTUALLY IS
Human perception can be understood as illusion, because it is a result of our imagination
Insufficient or ambiguous data  Imagination engaged, take shortcuts to fill gaps  Weak conclusions drawn, judgements formed based on weak evidence
Scientists: Statistical analysis used to judge whether a collection of observations are good enough for making a conclusion
Everyday people: Heavy reliance on gut instinct

4. IT IS OUR INSTINCT TO SEARCH FOR AND SEEK EXPLANATIONS IN PATTERNS
We tend to make up patterns in long sequences, or among a collection of sequences of events
Performance of stocks in financial markets is random, i.e. largely based on luck. Past market successes are not a reliable gauge for future success
Hot-hand fallacy: False notion that a random streak is due to talent
P(success|success) ≈ P(success|failure)
Higher average success/failure rate, higher tendency to exhibit longer, more frequent streaks of success/failure

5. BILL MILLER – TRUE TALENT?
His funds in every fifteen-year streak out-performed the portfolio of equity securities that constitute the Standard & Poor’s 500
Because of his achievements, he is acclaimed as the Greatest Money Manager of the 1990s, Fund Manger of the Decade, and one of the top thirty most influential people in investing for 5 years
Randomness, not talent, is more likely to be an explanation to Miller’s ability to maintain a fifteen-year streak in stocks
Miller’s ‘win’ is compared with his weighted average of the stock prices, and not with the S&P’s average. Has his own calendar year, so the streaks he achieved was unnatural, and favoured towards him by chance

6. FIGURES SUGGESTED FOR THE ODDS OF MATCHING MILLER’S PERFORMANCE PURELY BY CHANCE
Suggested estimates for the probability of a fund beating the market for twelve-consecutive years: 1 in 4096, 1 in , 1 in 2.2 billion
Actual chance: 3 out of 4
Chances of a particular person out-performing the market for a specific twelve-consecutive year period by chance are the three estimates
Actual probability for someone in some twelve-consecutive year period will be 3 out of 4
The number of people involved in the second calculation is higher. Anyone in this larger group can too achieve a streak, hence greater probability

7. FUNDAMENTAL CLASH BETWEEN HUMAN NEED AND ABILITY TO RECOGNISE RANDOMNESS
Events are random, we are not in control. We are in control, events are not random. Humans are more occupied with the outcomes and our ability to influence them. Exercise awareness of illusion of control can help to overcome them
Confirmation bias: Tendency to prove our ideas right instead of seeking reasons to prove them wrong
As a result of confirmation bias, we selectively focus on evidence that tends to confirm our hypothesis, or intentionally misinterpret ambiguous evidence in favour of our ideas

8. TAKE HOME MESSAGES Question our own perceptions and theories
Spend the same amount of time looking for evidence to prove we are right and to prove we are wrong
Understand how randomness operates allows us to draw conclusions depending on circumstances wisely