Saturday, October 31, 2015

Rock Breaks Scissors by William Poundstone

People are terrible at producing randomness. We are very bad at recognizing it, too. In his book Rock Breaks Scissors, William Poundstone describes the ways we misunderstand randomness. In addition, he shows how knowledge of this blind spot can help us to make better decisions, or at least help us to avoid being duped by fraudster or our own minds.

The early chapters of the book describe how researchers have come to identify our biases related to randomness perception, even if we do not wholly understand it. Poundstone avoids the textbook psychology and pulls examples from interesting sources such as mass experiments in parapsychology (designed to sell radios) and a machine that beats people at a child’s outguessing game using a simple algorithm.

These experiments reveal two important things about our perceptions for randomness. First, we are almost incapable of intuitively recognizing true randomness and prone to identify as random things that aren’t. In addition, we have all manner of unconscious preferences that show themselves when we try to be random, though we’re unaware of their appearing.

The book takes its title from another child’s outguessing game: rock-paper-scissor. I risk angry comments with this description, because some people take the game very seriously. Serious players have strategies for playing the game. These strategies probably provide little advantage over advanced players, but may give you an edge over ordinary players. My own impromptu experiment seemed to confirm it. (This is another trap we fall into: seeing patterns and drawing conclusions from small data sets that may be random.)

Another way our inability to be random is used is in detecting fraud. We can expect certain sets of number to occur in certain distributions of frequency. For instance, Benford’s law describes the frequency of first digits in numbers. The most common first digit is one, and the frequency declines for each digit to nine (leading zeros are ignored for the first digit). If the distribution of first digits is different, and especially if there are thresholds that may be associated with incentives, then there may be some fudging of the number. In other cases, you might expect the frequency of occurrence to be equal, such as the last two digits of numbers. People will avoid digit pairs that don’t seem random and unconsciously favor certain pairs. An uneven distribution of these pairs could be another sign of fraud. Keep this in mind when you’re preparing your taxes.

The utility of Poundstone’s strategies varies widely. The outcome of rock-paper-scissors means little to most of us (I would not risk something I care greatly about on it). On the other hand, a patient, long-term investor might gain an edge on the market that could amount to a lot of money over time. The chapter for homebuyers might also save you a lot of money by helping you avoid an overpriced market. Use caution, though. Poundstone is pointing out how you might outguess people, because people have trouble with randomness. You’re not going to outguess the lottery because truly random things can’t be outguessed.

William Poundstone also wrote Fortune’s Formula.  If you’re interested in this book, you may also be interested in

Poundstone, William. Rock Breaks Scissors: A Practical Guide to Outguessing and Outwitting Almost Everybody. New York: Little, Brown and Company, 2014.