"No century-scorer has ever been on the losing side of a World Cup final.

"
That was what they said on Twitter, TV and on the internet when Mahela Jayawarde
ne scored his hundred, as Sri Lanka went on to make 274. It was a crippling stat
istic the number of times it was repeated almost made me switch off the TV; what
was the point of watching the rest of the match if we had lost to the numbers?
If you went just by statistics, there were more reasons for India to lose, just
after the Sri Lankan total was posted:
Highest score ever chased successfully in a World Cup final: 241 (by Sri Lan
ka, 1996)
History of a team successfully chasing in a World Cup final: 2 out of 9 (23%
)
But since India won, we had "beaten the odds". Did we really? Consider that ther
e have just been nine World Cups in the past. That's already too little data. Ju
st nine World Cup finals is not enough to say the tenth has "odds stacked agains
t it". There were no odds to begin with.
Further, out of the nine past World Cup finals, only five have seen centuries. I
n 1983, when we beat West Indies, no one managed to even reach 50. That means th
ere were only five real data points. Commentators might be forgiven for throwin
g a sound bite ever so often, because when you hold a mike, you have to say some
thing, but listeners need to separate the wheat from the chaff.
Next, the idea that the past would determine the future, even when the past is b
ased on such shaky foundations, is strange. Especially when it made no sense wha
tsoever; there is no reason that a team with a century-scorer should always win,
and while I haven't done the analysis, I would be very surprised if in ALL one-
day matches, century scorers were always or even more than 80% of the time on th
e winning side.
Why do I harp about this? Because it happens all the time with investing and tra
ding. There was a scare in August 2010 about a "Hindenburg Omen", an obscure ind
icator that has supposedly preceded every major US Stock market crash since 1987
. But it hasn't quite indicated a crash every time it occurs just 25% of Hindenb
urg Omen occurrences were observed to have preceded a major market crash. And th
en, the indication required things like "The daily number of NYSE new 52-week hi
ghs and the daily number of new 52-week lows must both be greater than 2.2% of t
he total NYSE issues traded that day.
The 2.2% always gets me suspicious is there a reason for the 2.2%, or is it a nu
mber manufactured to make the indicator work? Put another way, are we assuming t
he conclusion and retro-fitting the data on to it? If 2% didn't work, let's try
2.1%. No? 2.2%. There. Or this could go on, like, "The number of 52-week highs s
hould be less than the number of sunspots recorded, unless there was a suicide i
n Manhattan." Eventually, you will have an indicator, and a brain full of jelly,
but not much else.
Many so-called indicators for stocks and indexes take on complex hues, such as t
aking on moving averages of moving averages and so on. The moving average is sim
ply a "smoothing" function it gets rid of periodic volatility to tell you the re
cent trend. But smoothing has its disadvantages; it reacts slowly to sudden chan
ges, so it will only tell you the trend has changed after the trend has changed,
sometimes too late to actually take action. A moving-average-based indicator wi
ll always be a little late, and you should naturally be suspicious of any 'formu
la' that can predict the next move, based purely on moving averages of price. At
best, they can tell you a trend, and if the hypothesis is that the trend will s
ustain, and that bears out historically in enough instances, you might have a ho
pe with it.
But you can always find a moving average that has predicted the market, using th
e right numbers and eliminating some inconvenient data by ignoring it does that
mean you've found the holy grail? I wish the answer was yes, because I have a wh
ole heap of such formulas invented over the years that are as profitable as used
toothbrushes.
"The real estate market has never gone down in any meaningful way" this statemen
t was often quoted by real estate agents and brokers in the US, and it might hav
e even been statistically valid, with over 50 years of data supporting it. But w
asn't that just correlation? Housing bubbles have been known to go bust in the p
ast, and in different countries. From Sweden to the UK to Greece to even the US
in the early part of the century, housing prices have fallen. While the argument
is moot today (US House Prices are STILL falling, after more than three years o
f a downward trend) it remains alive in pockets of the world. Especially the poc
ket where I live, in Gurgaon, where you can't lose money investing in real estat
e because no one ever has.
Eventually, statistics can influence behaviour. If the cricket team believed the
past statistic was going to be held true, then they could give up mentally and
make it true. If certain technical indicators are believed to work, they will wo
rk even more because people buy or sell just about when the indicator says so, m
arking peaks and bottoms well enough for the indicator to reinforce its usefulne
ss. I often wonder if I look at technicals because I believe in the concept or s
imply because the trading crowd tends to; the answer is irrelevant.
At some point things break away from the past. Even if you found a statistical i
ndicator that worked phenomenally, could you trust it enough to put all your mon
ey into its predictions? The answer, after all the "black swan" events that seem
to have swamped us in the last few years, is an emphatic no. As is the answer t
o the question, "Would you bet all your money on a team led by Dhoni in a World
Cup final"?
Deepak Shenoy is a co-founder of MarketVision, a financial education site and wr
ites at Capital Mind. You can reach him at deepakshenoy@gmail.com or @deepakshen
oy.