Anecdotal evidence is a dangerous thing

By DAVID MOON, Moon Capital Management, LLC
July 15, 2012

A cell phone video of middle-school students verbally abusing and threatening a 68-year-old New York school bus monitor is a recent reminder of the growing dangers of places that once seemed so innocent and genteel. It fits perfectly into the common narrative that the world is sliding faster into being an uncontrollably dangerous and risky place. Gone are the idyllic days when children could run free and not every sovereign disagreement ended in an armed conflict.

This mindset feeds our fears about both our physical and economic safety, reminding us of the modern-day dangers our parents never experienced.

Except that isn’t exactly true.

Anecdotal evidence is a dangerous thing. People unknowingly rely on it, thinking they are basing decisions and opinions on factual data.

But facts sometimes lie – at least when using a poorly selected subset of facts to draw macro conclusions about much larger issues.

Consider the increasingly violent nature of our world today.

Statistically significant data compiled by Harvard professor Steven Pinker in his book “The Better Angels of our Nature,” demonstrates that we are actually living in the most peaceful time in recorded history. It may not feel that way. It certainly doesn’t when we see warfare images in each day’s news and read of horrific crimes committed by mothers against their children.

But it’s true.

In the 19th century, the number of people killed in battle was 70 per 100,000 of population. In the 20th century – including the victims of two world wars, the number fell to 60.

In the first ten years of this century, the war death rate had fallen to 0.03 persons per 100,000 in population.

European murder rates have fallen from 100 per 100,000 people in the 15th century to about 1 per 100,000. In the US, rates of murder, domestic violence, domestic homicide and rape have all fallen in the past 100 years.

And the horrors of today’s terrorism and traditional armed conflict, while despicable, pale in comparison to the Trojan War atrocities described by Homer’s Iliad and Odyssey.

Despite common misconception, the world is not becoming more dangerous. Just because you say or hear something enough times doesn’t make it true. This is also true about investment matters.

For example, no matter how many times you’ve heard otherwise, there isn’t necessarily an inverse relationship between risk and return.

Volatility is not risk. Volatility is just volatility. Neither is risk beta, alpha nor Sigma Chi. Risk is the likelihood of losing your money.

Small stocks aren’t necessarily riskier than large stocks. Highly leveraged companies are what’s risky, regardless of size.

There is no study proving that asset allocation is responsible for 90 percent of your portfolio’s return. Most people quoting the oft-referenced 1986 Brinson asset allocation study don’t understand its actual conclusions.

Diversification doesn’t reduce risk; it guarantees expensive mediocrity.

Stock dividends and splits are illusions, meant to placate investors (and possibly directors) who don’t understand accounting.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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