If from some stock market advisor you received in the mail for six weeks in a row correct predictions on a certain stock index and were asked to pay for the seventh such prediction, would you? …consider the following con game.
Some would-be advisor puts a logo on some fancy stationery and sends out 32,000 letters to potential investors in a stock index. The letters tell of his company’s elaborate computer model, his financial expertise, and inside contacts. In 16,000 of these letters he predicts the index will rise, and in the other 16,000 he predicts a decline.
No matter whether the index rises or falls, a followup letter is sent, but only to the 16,000 people who initially received a correct “prediction”. To 8000 of them a rise is predicted for the next week, to the other 8000 a decline.
Whatever happens now, 8000 people will have received two correct “predictions”. Again to these 8000 people only, letters are sent concerning the index’s performance the following week, 4000 predicting a rise, 4000 a decline. Whatever the outcome, 4000 people now have received three straight correct predictions.
This is iterated a few more times until 500 people have received six straight correct “predictions”. These 500 people are now reminded of this and told that in order to continue to receive this valuable information for the seventh week they must each contribute $500. If they all pay, that’s $250,000 for our advisor. If this is done knowingly and with intent to defraud, this is an illegal con game. Yet it’s considered acceptable if it’s done unknowingly by earnest, but ignorant publishers of stock newsletters, or by practitioners of quack medicine, or by television evangelists. There’s always enough random success to justify almost anything to someone who wants to believe.
From “Innumeracy” by John Allen Paulos
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