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Noise - Daniel Kahneman


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New book coming soon.

 

"In Noise, Kahneman, Sibony, and Sunstein show the detrimental effects of noise in many fields, including medicine, law, economic forecasting, forensic science, bail, child protection, strategy, performance reviews, and personnel selection"
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  • 7 months later...

I am listening to it as an Audiobook. Chapter 2 had an interesting experiment where 42 experienced investors were asked to value a business based on 3 years of balance sheet and income & cash flow statement summaries. The variance of the result was more than 40%. That's an interesting baseline data to keep in mind. it means that if you think something is 20% overvalued (or undervalued), there is a good chance you could be wrong (assuming you are an average experienced investor).

 

At the very least, this means once should be a bit careful when selling something, because it reaches fair value.

 

If you think the above is bad, you will be shocked when the listen (or read) about the findings when data and experiments were analyzed regarding the criminal justice system.

Edited by Spekulatius
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11 minutes ago, Spekulatius said:

I am listening to it as an Audiobook. Chapter 2 had an interesting experiment where 42 experienced investors were asked to value a business based on 3 years of balance sheet and income & cash flow statement summaries. The variance of the result was more than 40%. That's an interesting baseline data to keep in mind. it means that if you think something is 20% overvalued (or undervalued), there is a good chance you could be wrong (assuming you are an average experienced investor).

 

At the very least, this means once should be a bit careful when selling something, because it reaches fair value.

 

If you think the above is bad, you will be shocked when the listen (or read) about the findings when data and experiments were analyzed regarding the criminal justice system.

 

So he's saying everything in life is like a Rorschach test? Sounds about right 🥱

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1 hour ago, Spekulatius said:

The variance of the result was more than 40%. That's an interesting baseline data to keep in mind. it means that if you think something is 20% overvalued (or undervalued), there is a good chance you could be wrong (assuming you are an average experienced investor).

Ive been politely(and sometimes not so politely) been suggesting this to folks for a long time. Put your fuckin geek sheets and Excel tabs away and focus on the bigger picture. If a 10-20% valuation differential matters to your investment thesis you're wasting your time. I always get a kick out of the smart guy book reports that ultimate lay out a thesis that more or less says, "if a, b, c, d, e, AND f, occur...you've got 25% upside"...so dumb and such a waste. 

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Uhgg. This is very applicable to investing, message boards and use of social media. Kahneman also talks bout this in his book, that's why I am posting this here:

 

https://www.pnas.org/content/108/22/9020

 

Social groups can be remarkably smart and knowledgeable when their averaged judgements are compared with the judgements of individuals. Already Galton [Galton F (1907) Nature 75:7] found evidence that the median estimate of a group can be more accurate than estimates of experts. This wisdom of crowd effect was recently supported by examples from stock markets, political elections, and quiz shows [Surowiecki J (2004) The Wisdom of Crowds]. In contrast, we demonstrate by experimental evidence (N = 144) that even mild social influence can undermine the wisdom of crowd effect in simple estimation tasks. In the experiment, subjects could reconsider their response to factual questions after having received average or full information of the responses of other subjects.

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