Sunday, March 6, 2011

patterns in randomness

Humans have a natural tendency to see order in chaos. In most scenarios this is extremely useful, it created science and a deeper understanding of the universe, it simplifies our decision making.


The down side of this tendency is that we also naturally look for:



  • order

  • patterns

  • meaning


in things which are just random.



Can you see the face?

Can you see the face?


Of course there is no face, it is just a picture of tree bark.


Another more financial example of pattern spotting is:


An upward trend .....

An upward trend .....


..... or just random noise in a downward trend?

..... or just random noise in a downward trend?


This is related to what psychologists call the ‘clustering illusion’. Which of the following lines do you think are truly random series of 1′s and 0′s ?


1 0 0 0 1 0 1 1 1 0 1 0 0 1 1 1 1 0 0 0
0 0 1 1 1 1 1 0 0 1 1 0 1 1 1 0 1 0 1 1
0 1 0 1 1 0 0 0 1 0 0 0 1 1 1 1 0 0 1 0
0 0 1 0 1 1 1 0 1 0 0 0 1 1 1 1 0 1 1 1
1 0 0 0 0 1 1 1 1 1 0 0 1 1 1 0 0 0 1 1


You probably already guessed that they are all random (or as random as the computer programme that I wrote to generate them can make them) but we still tend to notice an inordinate amount of ‘clusters’ of 1′s and 0′s. This clustering illusion is apparent in the false beliefs of many gamblers.


So when we are examining data in order to make a decision on it, it is crucial that we are aware of this tendency and that we ask ourselves whether the patterns we think exist in the data are truly there.



link to article

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