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www.johnkay.com
Risk and reality John Kay Finance
Investment Conference Edinburgh, 24th June 2003
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Casino
www.johnkay.com
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Professor Sir Roy Meadow
One cot death is a tragedy, two is suspicious,
three is murder. The probability of a cot
death is 1 in 8500. The probability of two in the
same family is 1/8500 x 1/8500, or around in 1 in
73 million. Thats like backing a long odds
winner in the Grand National four or five times
in a row.
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O. J. Simpson
The probability that a random DNA sample matches
the original is 1 in 4 million
Prosecution Therefore, since Simpsons DNA
matches that found at the scene, Simpson is
guilty Defence There are over 20 million
people in the Los Angeles area, so there are
probably five whose DNA would match. This cannot
establish guilt beyond reasonable doubt.
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Intertemporal choice

• Which would you prefer
• 100 now or 120 in a weeks time?
• 100 in a years time or 120 a year and a week
  from now?

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The Wason Test
All cards with animals on the front have an even
number on the on the back. Which cards must you
turn over to ensure this rule is satisfied
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No one under 18 is allowed to drink alcohol. On
entering the pub, you see

• a young person
• someone drinking a coke
• an old age pensioner
• someone drinking beer

What checks do you need to make to ensure the law
is being observed?
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Type 1 and type 2 errors
A friend has just tested positive for a rare and
serious disease. The disease affects 1 in 1000
of the population and the test is 98 accurate,
I.e. 98 of those who have the disease test
positive and 98 of those who do not have it
receive a clear result. How likely is it that
your friend has the disease?

• very likely

• more likely than not

• not very likely

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Linda lives alone,read social history at Anglia
Polytechnic University. She was active in
organising demonstrations against Shell over the
Brent Spar Affair. Which of the following do you
think is more likely?

• Linda is a bank manager
• Linda is spokesperson for the Animal Liberation
  Front
• Linda is a bank manager who is active in the
• feminist movement

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The Monty Hall problem
You are in a quiz show and have successfully
answered some easy questions. You are asked to
choose one of three boxes one contains the keys
to a new car, the other two have booby
prizes. You choose box 2. The host teases you
by opening box 3 and showing you that it contains
a booby. He asks you if you want to change your
mind and choose another box. Do you?
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Intertemporal choice

• Which would you prefer
• 100 now or 120 in a weeks time?
• 100 in a years time or 120 a year and a week
  from now?

Time inconsistency
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Wason Test
All cards with animals on the front have an even
number on the on the back. Which cards must you
turn over to ensure this rule is satisfied
Abstraction is hard
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Type 1 and type 2 errors
A friend has just tested positive for a rare and
serious disease. The disease affects 1 in 1000
of the population and the test is 98 accurate,
I.e. 98 of those who have the disease test
positive and 98 of those who do not have it
receive a clear result. How likely is it that
your friend has the disease?
Background information

• very likely

• more likely than not

• not very likely

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Linda lives alone,read social history at Anglia
Polytechnic University. She was active in
organising demonstrations against Shell over the
Brent Spar Affair. Which of the following do you
think is more likely?
Pictures and patterns

• Linda is a bank manager
• Linda is spokesperson for the Animal Liberation
  Front
• Linda is a bank manager who is active in the
• feminist movement

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Persian Gulf
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