Blaming Bernanke For QE2

NYTimes has an article today titled “Stimulus by Fed Is Disappointing, Economists Say”. The key argument being put forth is that the bond buying program did not achieve enough – there has been no significant improvement in many parameters including growth inflation and employment.

This kind of blame is classic narrative fallacy. Let us look at the definition of Narrative Fallacy again:

“Our need to fit a story or pattern to a series of connected or disconnected facts”

This from the article:

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

Thats classic “I told you so” – which is a clear symptom of Narrative Fallacy. We believe the response from The Economist – Who’s disappointed in QE2? nails it:

“The Fed chose a direction rather than a destination, and when its action left it short of the destination, it opened the door to criticism that the direction was wrong, when in fact it may simply have traveled an insufficient distance (perhaps thanks to unexpected headwinds). If you target a destination, you don’t run into that problem.”

Source: NYTimes, The Economist

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The Airbnb Episode: Classic Narrative Fallacy?

Fred Wilson’s post on not funding Airbnb, and then PG’s response with some email communication around that time – put these things together, and you get a great lesson for any VC: summarized very well by Fred:

We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do. I am proud that our portfolio is full of companies where we saw the vision before other investors did and backed a great team. But we don’t always get it right. We missed Airbnb even though we loved the team. Big mistake. The cereal box will remain in our conference room as a warning not to make that mistake again.

If there ever could be a textbook example of Narrative Fallacy, this would be it. Let us look at the definition of Narrative Fallacy:

“Our need to fit a story or pattern to a series of connected or disconnected facts”

Remember what triggered this post: this question: “Tell us about something you saw that was intensely interesting but was not something you’d invest in. And why.”

Looking back at events to gather evidence for this is simple, as PG has proved. It is easier to fit a story as well (if the founders are great fund them) – hindsight is 20-20; the tricky thing is this: what is the heuristic to identify such greatness?

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The Problem With The Pew Study

“65% of internet users have paid for online content” – you will see this headline all across the internet in this coming week. Thanks to a survey by the Pew Research Center, these numbers will be interpreted in multiple ways and mostly used to convince stakeholders of all categories that people have finally started paying for things on the Internet. The full report is here.

So whats the issue with the study? The one number from the report that will NOT be quoted is this: 1003. That number is the total number of people that participated in the survey.

From the report:

The PSRAI October 2010 Omnibus Week 4 obtained telephone interviews with a nationally representative sample of 1,003 adults living in the continental United States. Telephone interviews were conducted by landline (672) and cell phone (331, including 134 without a landline phone). The survey was conducted by Princeton Survey Research Associates International (PSRAI). Interviews were done in English by Princeton Data Source from October 28?November 1, 2010. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error for the complete set of weighted data is ±3.7 percentage points.

Definition of sampling error from Wikipedia:

The likely size of the sampling error can generally be controlled by taking a large enough random sample from the population,[2] although the cost of doing this may be prohibitive; see sample size and statistical power for more detail. If the observations are collected from a random sample, statistical theory provides probabilistic estimates of the likely size of the sampling error for a particular statistic or estimator. These are often expressed in terms of its standard error.

So here is what is missing from the Pew study: Where are the probabilistic estimates of the likely size of the sampling error? The report quotes some percentage points – what are the calculations that have gone into it?

And for everyone claiming that most internet users now pay for online content – this is classic Narrative Fallacy. Yes there has been a survey and there are results. Yes there has been an uptick in online content purchase activity. But connecting these is Narrative Fallacy – our need to fit a story or pattern to a series of connected or disconnected facts.

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