A Bourse Diary

Thoughts on stocks, speculation and ... life

Wednesday, February 07, 2007

Sentiment Charts - do not trust them

Always be sceptical when you see statistics. With graphs it can get even worse:

In the investment world, this takes the form of scores of misleading systems, charts, and tables, all purporting to show a relationship that does not really exist. The process of extracting information from data, or data mining, requires great skill if the results are to be meaningful. Since the untrained analyst takes all of the data and examines thousands of different possible relationships, something will always turn up. Statisticians call this "data dredging".

Sometimes it is not obvious that hundreds or thousands of combinations have been tested. This is particularly true when the result is a graph showing what appears to be a compelling relationship. In the investment world, these graphs appear all of the time.

Via: SeekingAlpha, Homebuilder Sentiment and the Stock Market

I have studied statistics long enough to at least know that reading them properly is not that easy. Variables can appear to be in a relationship, but in fact there is some other factor which determines those variables, and so on... In the financial world, unfortunately, just few investors care about proper analysis. The mass of them just takes a look on some constructed chart or relationship and makes decisions. It's ridiculous.


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