In everyday life, people are regularly taken in by con men who rely on public ignorance of reason and science. Here's an example – you receive a mailing from someone who wants to be your financial advisor. He predicts that the stock market will fall (or rise) during the next month. At the end of the month, his prediction turns out to be correct. Then, for six months straight, he mails you a prediction, and each prediction turns out to be correct. In a quick calculation you realize you would have made several million dollars by following his advice.
Having “proven” his abilities, the financial advisor now wants you to give him control of your portfolio. His is the best performance you have ever seen, he obviously has special skills, what do you do? Well, hopefully you follow the cardinal rule: Always consider alternative explanations.
Here is a very likely alternative explanation – the “financial wizard” is a con man, a hustler. Here is how this well-known con works:
1. At the beginning of the six-month period, the "wizard" mails a prediction to a list of 16,384 people. He tells half the people the market will rise, the other half that it will fall.
2. At the end of the first month, he drops half the names from the list (those who got an incorrect prediction) and mails a new prediction to the remaining names.
3. He repeats this procedure for six months, each month dropping half the names and keeping those that got a correct prediction.
4. At the end of six months, he has a list of 256 very hot prospects, each of whom has gotten a seemingly miraculous run of correct predictions, each of whom might just sign up for his "services," each of whom is about to be swindled.