# thoughts…

## Probability Through Problems: a new approach to teaching probability

“Which team will win? - introducing tree diagrams and the method of collecting data which is then interpreted in terms of what we would expect if we could collect enough data
The dog ate my homework - building on this, expressing expected results in the form of proportions, and hence answering questions about how likely an event is
Who is cheating? - from expected results to probabilities in the form of fractions, and the multiplication rule (and onto conditional probability)
Prize Giving - from experiment to sampling with and without replacement…”

http://nrich.maths.org/newprobapproach

## Is Alzheimer’s Type 3 Diabetes?

“The idea that Alzheimer’s might be Type 3 diabetes has been around since 2005, but the connection between poor diet and Alzheimer’s is becoming more convincing, as summarized in a cover story in New Scientist entitled “Food for Thought: What You Eat May Be Killing Your Brain.” (The graphic — a chocolate brain with a huge piece missing — is creepy. But for the record: chocolate is not the enemy.)…”

http://opinionator.blogs.nytimes.com/2012/09/25/bittman-is-alzheimers-type-3-diabetes/

## Rethinking Sleep

“Sound familiar? You’re not alone. Thanks in part to technology and its constant pinging and chiming, roughly 41 million people in the United States — nearly a third of all working adults — get six hours or fewer of sleep a night, according to a recent report from the Centers for Disease Control and Prevention. And sleep deprivation is an affliction that crosses economic lines. About 42 percent of workers in the mining industry are sleep-deprived, while about 27 percent of financial or insurance industry workers share the same complaint…”

http://www.nytimes.com/2012/09/23/opinion/sunday/rethinking-sleep.html?src=twrhp&_r=0

## A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ‘em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form…”

“What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine…”

“So let’s briefly review what kind of models and techniques constitute this basic knowledge that everybody has to have before they proceed to being really good at a narrow art like stock picking.

First there’s mathematics. Obviously, you’ve got to be able to handle numbers and quantities—basic arithmetic. And the great useful model, after compound interest, is the elementary math of permutations and combinations. And that was taught in my day in the sophomore year in high school. I suppose by now in great private schools, it’s probably down to the eighth grade or so…

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a onelegged man in an asskicking contest. You’re giving a huge advantage to everybody else…”

“You might ask why that is so important? Well, again that’s a rule of psychology. Just as you think better if you array knowledge on a bunch of models that are basically answers to the question, why, why, why, if you always tell people why, they’ll understand it better, they’ll consider it more important, and they’ll be more likely to comply. Even if they don’t understand your reason, they’ll be more likely to comply…”

“Which models are the most reliable? Well, obviously, the models that come from hard science and engineering are the most reliable models on this Earth. And engineering quality control—at least the guts of it that matters to you and me and people who are not professional engineers—is very much based on the elementary mathematics of Fermat and Pascal…”

“I don’t think it’s necessary for most people to be terribly facile in statistics. For example, I’m not sure that I can even pronounce the Poisson distribution. But I know what a Gaussian or normal distribution looks like and I know that events and huge aspects of reality end up distributed that way. So I can do a rough calculation…”

“I suppose the next most reliable models are from biology/ physiology because, after all, all of us are programmed by our genetic makeup to be much the same…”

“The elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important…”

“One approach is rationality—the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions—many of which are wrong…”

“Another advantage of scale comes from psychology. The psychologists use the term social proof. We are all influenced—subconsciously and to some extent consciously—by what we see others do and approve. Therefore, if everybody’s buying something, we think it’s better. We don’t like to be the one guy who’s out of step.

Again, some of this is at a subconscious level and some of it isn’t. Sometimes, we consciously and rationally think, “Gee, I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?”…”

“CBS provides an interesting example of another rule of psychology—namely, Pavlovian association. If people tell you what you really don’t want to hear what’s unpleasant—there’s an almost automatic reaction of antipathy. You have to train yourself out of it. It isn’t foredestined that you have to be this way. But you will tend to be this way if you don’t think about it…”

“So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence…”

“The model I like—to sort of simplify the notion of what goes on in a market for common stocks—is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market…”

“Given those mathematics, is it possible to beat the horses only using one’s intelligence? Intelligence should give some edge, because lots of people who don’t know anything go out and bet lucky numbers and so forth. Therefore, somebody who really thinks about nothing but horse performance and is shrewd and mathematical could have a very considerable edge, in the absence of the frictional cost caused by the house take…”

“And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom…”

“The way to win is to work, work, work, work and hope to have a few insights…”

“From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers.

And it was always screwed up. They could never get it done on time. They tried everything—moral suasion, threats, you name it. And nothing worked.

Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it’s all done, they can all go home. Well, their problems cleared up overnight…”

“The second basic approach is the one that Ben Graham used—much admired by Warren and me. As one factor, Graham had this concept of value to a private owner—what the whole enterprise would sell for if it were available. And that was calculable in many cases.

Then, if you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value, he would say that you’ve got a lot of edge going for you. Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety—as he put it—by having this big excess value going for you…”

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects…”

http://ycombinator.com/munger.html

## The Manhattan Project to End Fad Diets

“Imagine what could be done if we had an X-men-like group of the world’s best scientists, independently funded and uninfluenced by industry, tackling the most important questions in nutrition?…”

“…Do we really have good science to support our diet recommendations? The answer is convincingly no. The largest public health crisis in the United States is being addressed with the type of data that we question in every other field of medicine: observational studies subject to selection bias, and small scale, short-term clinical studies which can’t offer definitive results…

It’s well past time for an effort such as that proposed by NuSI–to test our hypotheses with rigorous science. We owe this effort to the public and to our children who otherwise could suffer from the disastrous consequences of our scientific hubris on this issue.”

http://www.fourhourworkweek.com/blog/2012/09/12/nusi/