Posts Tagged ‘bias’

Another biased media report: home loans on the rise?

Tuesday, July 13th, 2010

In our report, How To Foolproof Yourself Against Salesmen & Media Bias, we wrote about how the media uses headlines to slip in their bias.

Well, here is a great example from this article in the Sydney Morning Herald (SMH)- Home loans on the rise:

The number of home loans issued to borrowers have marked their first rise in eight months are buyers looked beyond higher interest rates to wade back into the market. In a sign of caution, though, the size of a typical loan shrank.

In an another article from the SMH- Home loans up for first time in eight months:

A WEAK spot in the property market is showing tentative signs of recovery, after a surprise bounce in new lending to home buyers.

The headlines from the Daily Telegraph isn?t much better.

Despite the positive spin in these headlines, there?s a little detail that caught our eye. What is it?

These paragraphs were tucked in Home loans on the rise:

The monthly rise also masked some mixed trends including a surge of refinancing sparked by lower 3-year fixed rate loans, said Westpac senior economist Andrew Hanlan.

Excluding refinancing, the May figure is up only 0.8 per cent, following a 0.1 per cent fall in April, according analysis by Westpac.

Borrowing for owner occupied housing also edged down 0.3 per cent to $13.7 billion, seasonally adjusted.

In other words, most of the ‘rise’ in home loans are due to refinancing. Refinancing basically means ‘closing out’ the existing loan and taking out a new loan. The headline number included the refinanced new loan but does not subtract the old loan that was ‘closed out.’

Arguably, when refinancing increases, it is a sign of financial stress as borrowers tend to refinance themselves out of problems first before trying other options. Although this may or may not be the case for the majority of refinancing, at the very least, the reality is not as positive as what the headline implies.

We shall see.

Should precise percentage of odds (of whether something will happen) be treated as nonsense?

Tuesday, June 29th, 2010

Recently, we saw an article that reported,

There is a 10 percent to 20 percent chance of BP being taken over,? said Gudmund Halle Isfeldt, an Oslo-based analyst at DnB NOR ASA, in an e-mailed note this week.

Whenever we read about analysts stating precise odds about whether certain event will happen (e.g. takeover, interest rates movement), we get very suspicious. How do they come up with such precise percentage? More importantly, are these kinds of precise numbers valid in the first place? If not, why?

To answer this question, let?s go back to the very basics.

Consider the odds of a dice showing up a ?1? on a throw. Obviously, the odds are 1/6. What if you do not know that the dice has 6 sides and instead, incorrectly think that there are only 5 sides on it? In that case, your computation of the odds (1/5) will be wrong. What if, you correctly understand that the dice has 6 sides but instead, do not know that the dice is loaded? In this case, your computation of the odds (1/6) is wrong because the dice is biased.

In both cases, there is a gap between how much you think you know and how much you actually know. The wider the gap, the more wrong your computation of the odds will be. As we quoted Nassim Nicholas Taleb in Failure to understand Black Swan leads to fallacious thinking,

Epistemic arrogance bears a double effect: we overestimate what we know, and underestimate uncertainty, by compressing the range of possible uncertain states (i.e. by reduce the space of the unknown).

?

I remind the reader that I am not testing how much people know, but assessing the difference between what people actually know and how much they think they know.

Whenever an analyst give such precise percentage for the odds of whether something will happen, he is implying that the gap between how much he actually know and how much he thinks he knows is very small. Perhaps it is true that he is really that knowledgeable. But it is very common for humans to underestimate the size of that gap when it comes to assessing themselves.

In the case of assessing the odds of a corporate takeover that has implications on national interests, perhaps something is happening secretly within the inner recesses of corporate and political machinery? Chances are, if the analyst is privy to the secret happenings, he will have to drastically change his assessment of the odds. If not, his assessment is like assessing the odds of a dice while not knowing it is loaded. When analysts show their confidence by giving such precise percentages, we can?t help but wonder whether he is falling into Ludic Fallacy (see How To Foolproof Yourself Against Salesmen & Media Bias).

For investors, they are at a disadvantage. You see, when assessing the odds of a dice throw, you can easily verify whether your assessment is correct or not (e.g. whether the dice is loaded) by repeating the throw many times and then use statistical analysis to check the results. But what about assessing whether BP will be taken over? Unfortunately, this event, if it happens, will only happen once. That means there?s no way you can verify the analyst?s number. For example, if the analyst said that there?s a 91.32 percent change that BP would be taken over and if that event did not happen, there?s no way you could prove that the analyst got the number very wrong. He could argue that it is due to sheer bad luck that it did not happen.

Thus, whenever analysts give such precise percentage of odds, ponder how big the gap is.