I am finally in my reading groove again. The nice weather outside makes it much easier since I can sit on my porch without the distraction of television and enjoy an adult beverage while reading. The book I just finished is The Drunkard’s Walk: How Randomness Rules Our Lives. Despite the title and my recent new love affair with Craft Beer, this book is not about drinking. It is much more about statistics, probability and randomness. Rather than summarize the book, I am going to share the two main stories I enjoyed the most from the book. This book is not for everyone. It is very technical in some spots. But, if you like to challenge traditional thinking and open your own mind then you would probably enjoy this read.

Randomness of Hollywood

One section of the book explores the randomness of Hollywood and how, despite what we may think, the success of filmmakers, executives, writers and even some actors is somewhat random. Among the many examples was the story behind Star Wars and George Lucas. Lucas failed numerous times to get funding to make his first Star Wars movie. When he finally convinced a studio to take on the project, they had such little confidence in its success they only gave him 200k. The studio, again showing little confidence, allowed Lucas to keep 100% of any merchandising. You don’t have to be a Star Wars fan to know the empire Lucas built on the Star Wars franchise. How could well over a dozen studios miss that badly? In the book, Leonard Mlodonow argues the reason they can miss so badly is because the success is based on randomness. 

Another Hollywood example Mlodonow uses is Bruce Willis. Willis barely received his first major role in the TV Series Moonlighting. The show was nearly cancelled after its first season but then, almost all of a sudden, the show caught steam in its second season and Bruce Willis was thrust into stardom and soon became a movie star. Did he change his look or acting style between season one and two? Did the network pour more marketing time into the show to boost ratings? Nope. Randomness.

Mlodonow moves on to explore how humans like to be in control and the thought of randomness is a scary one. But what Mlodonow does is explain how statistics and probability allow for the randomness to make sense.

Monty Hall Paradox

One of the excerpts from the book that I found the most fascinating was an exploration into the Monty Hall Paradox. The name comes from the host of the once popular game show Let’s Make a Deal. In the game show the contestant would be given the choice of three doors. One door would have a nice prize while the other two would not. If the contestant were to choose door one, for example, the host would open either door two or door three revealing one of the doors (let’s say door tow) without a prize behind it. The contestant is then giving the chance to change their choice and pick the other unopened door or stick with their original choice. The question is, is it in the contestants advantage to switch their choice?

The answer, first written about in Parade magazine’s “Ask Marilyn” column, is that you should always change your answer. The column was disputed by thousands of PhDs. Marilyn stuck by her conclusion and finally explained it and later proved it by going back to the tapes of the show. Many people would think that you have a 50/50 chance of being right when there are only two doors left. This is wrong. Probability shows you are more likely to be right if you change your first choice. Here is why:

When there are three closed doors for you to choose from, you have about 33% chance of guessing correctly. When one of the doors is revealed to not have the prize then it now leaves two doors open. However, remember there was a 66% chance your first choice was wrong. Statistically speaking, you should change doors to play the better odds. It can be a tough concept to understand and even believe. The tapes of the show proved it to be correct. Contestants who changed their original answer were right more often by a ratio of 2 to 1.

Do you think it is a 50/50 chance that a woman who has one daughter will end up with another daughter? It’s not. It’s only 33%.

If you like ideas and thought problems like this then give the book a read. 

Matt

CFP®, Owner

I recently finished the book Griftopia by Rolling Stone journalist Matt Taibbi. Thanks to one of our clients for suggesting the read. Honestly, I almost stopped reading in the first chapter. I thought it was going to be an entire book about politics (a subject I literally can’t stand since I think both parties are painfully inept and doing anything correctly). Thankfully, it didn’t take long for Taibbi to move from the attacking the Tea Party to CNBC to Alan Greenspan to ObamaCare and pretty much anyone or any organization in his path. Although, after also reading Boomerang by Michael Lewis, I don’t think the US is nearly in as bad a shape as most other countries. Taibbi does explain how the 2008 bubbles (yes there were several at once) were actually inflated and he goes well past the 1970’s to do so.

The chapter on Alan Greenspan was extremely interesting. I remember vividly in College (I was an economics major) discussing how “important” Greenspan was to the country and the world. As we have seen since 2008 much of his praise was undeserved and Taibbi paints an astonishing picture of why and how Greenspan built trust from Presidents of both political parties and the public. He stops short of blaming everything on him…but just barely.

The sections on Goldman Sachs were not new to me (being in the financial industry) but Taibbi was able to tell the story of their involvement in a very entertaining writing style (with some well place f-bombs here and there). To me, this was one of the most infuriating chapters because not much has changed. In fact we now have few big banks controlling a larger piece of the US economy. The way Goldman Sachs changed their requirements for underwriting IPOs in the late 90’s borderlines on criminal (in my opinion) but that is nothing compared to some of the stories outlined in the book. For a company to purposely create and sell investments that it knew was junk while at the same time betting against it screams of greediness to a level unseen before. And to think, tax money was spent sending Martha Stewart to jail while this sort of thing was going on at Goldman.

Unfortunately (but not surprising), Taibbi does not offer any sort of solution to all the problems he brings up. No one can. Yes, the Government bailed out some banks while letting others implode. Yes, Wall Street and the Government seem to get a lot of things wrong. How do we solve it? The good news with all of this stuff is that it is in the record of history. We just have to learn from it.