STATISTICS LIE: The average return, the hundred year flood and Babylon

One of the things that human beings are really good at is misinterpreting facts. It’s a coping mechanism to make us feel better. Commonly accepted “facts” are twisted into more flawed conclusions than dough at a pretzel factory.

I understand we all want to maintain a hopeful perspective on the future. That is what keeps us going when things look rough. But we do ourselves a terrible disservice when we don’t examine the real risks in life.

Financial experts often tout the “average” rate of return on an investment as if it is something that can expected. The average return is nearly never achieved. It’s pretty much a lie or a severe misinterpretation of the data – to be polite about it.

What people can expect in the short term (where they live) is a return of somewhere between -50% and plus 50% annual return with more years likely to be positive than negative. This is not something that the financial service industry really wants to put in TV commercials or in its shiny brochures. Nor is it what most investors want to ponder. But it’s the truth.

Likewise assuming home prices will always increase because the have for 75 years is a recipe for mass calamity. Reality and risk have no sympathy for statistical averages, traditions or even civilizations. Trees don’t grow to the moon. They eventually mature, die and decay.

For 2,000 years Babylon was the largest are most advanced civilization in the World. Today, they have to dig in the sand to try to find evidence it ever existed.

The commonly referred risk of the “hundred year flood” doesn’t occur one time every millennium in the United States. It happens nearly every day.

Here is what the statistics really mean: If there are 100 different communities in the data set it is likely that one of these communities will have a flood every year. It’s pretty much a certainty that there will be a flood somewhere. We just don’t know where it will be or who needs to buy the galoshes.

I believe in America and the humanity of our specie despite our obvious flaws. But we need to get REAL and stop telling ourselves phony statistical fairy tales. I believe we can handle the truth.

Do you?

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