I read the San Jose Mercury News article today titled "Bay Area homes' price down 1.4% from a year ago" and pictured yet another heated discussion between the two propaganda crowds.
You know, the ones who want to make money and blindly say the sky isn't falling and the others who always carry around steel-reinforced umbrellas, not for protecting others, but to whack other people over the head with after they say, "I told you so."
Clearly there's some middle ground.
Data is open to interpretation, and just like you can turn Mary Poppins into a horror movie or The Ring into a love story, with a little music and some sound effects, you can move from lies, to damn lies, to statistics in just the same amount of time. So the key is to be able to think for yourself and make decisions that are based on your own requirements and risk tolerance.
This article isn't about whether or not the interpretation of the data is right. (The folks at Square Feet who focus on Silicon Valley have their own positive interpretation on their sister publication's article and, in general, the folks at View from Silicon Valley take more cynical viewpoints.)
This article is about some of the basics of how people use statistics and is based on an interpretation of the book "How to Lie with Statistics" written by Darrell Huff. The interpretation was written by the folks in the physics department at SMU.
We've all done it. You see those commercials for mutual funds feature the infamous disclaimer, "Previous performance is not an indicator of future results," but in your head, you're taking your money and multiplying it by the percentages they mentioned.
While reputation may give you a sense of the probability that those percentages will come through, there's no guarantee. Emotionally, extrapolation shows up as feelings that, "The market's up, the sky's the limit," or, "It's down, there is no tomorrow." Helping reign in these feelings is where risk assessment comes in.
People taking on average risk, most folks, need to understand what they are willing to possibly give up in order to probably gain something. Risk averse people try to minimize any loss regardless of the potential gain. Gamblers are willing to probably lose something to possibly gain something much greater. Adrenaline junkies are gamblers who will bet on anything regardless of the reward.
Understanding your personality will help you avoid the pitfalls of extrapolation and make better decisions based on your needs, and how much more "probably" is than "possibly."
Cherry-picking is when you take a couple key points out of context from a large amount of information to support your side of the story. The key words are "out of context" and it's usually an implication rather than a blatant lie that gets people. For example, a more subtle title for the SJ Mercury article could have been, "Silicon Valley median home prices up 2.7%" leaving the definition of Silicon Valley up to interpretation. The article, instead, explicitly states Santa Clara county.
Casinos are the most notorious cherry pickers. When was the last time you heard bells and whistles beneath the flashing lights of a slot machine where someone lost? Clearly, they want to call attention to the winners to inspire hope in others that the chance of winning big is more "probably" than not.
I bring up gambling because that's exactly what real estate speculation is. And a lot of folks who bought cherry-picked stories about real estate riches and extrapolated based on the state of the market a couple years ago are getting squeezed. Market speculation can't be stopped, but by understanding their mentality, people can more comfortably adjust to them.
One plus one equals B?
This happens when people confuse correlation, related events, with causation, events that cause each other. Take the hypothetical statement, "Staged houses sell faster, therefore staging my house will help it sell faster." In this example, whether a house is staged and how long it takes to sell the house may be related (correlation), but that doesn't prove that staging directly causes a house sell faster (causation).
Hypothetically, there could be a number of other factors including the profile of agents who recommend staging, what neighborhoods usually have a lot of staged homes, or even staging companies who are tied in to buyers. The point is that just because two things are related, doesn't mean one causes the other.
With this in mind, the question moves away from asking what is the right formula for success, but towards knowing the actions you are most comfortable with, then understanding the trade-offs involved with your choice. When you understand the options at your disposal and how they might influence (not cause) events, you'll be better prepared to adjust and act when the time comes.
Bottom line: information is like PlayDoh and can be shaped however you want it to be, but by knowing your options, understanding yourself, and being informed of the possibilities, you'll be empowered to make the best decisions for you and your family.