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Biased Investments – Cognitive dissonance disorder


When Private Equity banks assess investments, objective quantitatively analyzed data is not a luxury but a necessity.

“Measure what is measurable, and make measurable what is not so” said Galileo Galilei, when humanity was just emerging from the dark ages. This is more than good advice but the basis of science. Show me the properly analyzed data is a sure stepping stone to show me the money. If all you listen to is CNBC Cramer or when Jaimie Diamond tells you that you got a steal when he got to take over Bear Sterns and now he claims Jaime Diamond was forced by the by the Fed’s, to take that deal, we all seem to see clearly the contradictions. Yet Wall Street seems to listen to the same ilk by the definition (show me where the money is) by the amount of advertising CNBC gets for Cramer or that he is still on the air! Many investors today have serious sums held in Private Equity banks that watch Cramer! Subconsciously what he cites on CNBC is a big part of their inner calculations. Today many financial conservatives today seem to surround themselves with the same people offering the same information and are living in a bubble. Was it wish-craft that got Bernie Madoff’s investors in the situation they found themselves in? In the first years of the 20th century, William Gosset just began to formulate the ideas that led to modern statistics, but when he died just 30 years later he was eulogized as one of the” founders of theories now generally accepted for the interpretation of industrial and other statistics.” A mere few decades after its common day applications to businesses, industry already found statistics indispensable however it also became clear based on Cognitive dissonance that statistics don’t lie but you can lie with statistics!
In the words of William Deming, a statistician and business consultant credited with helping make Japan more than merely competitive in industry with the United Sates less than a decade after the devastation of world war II, “The only useful function of a statistician is to make predictions, and thus to provide a basis for action.”. However sources providing such data can be faultier by using a Trojan horse that portends valid information that you accept based on your cognitive biases which have been led you to your cognitive dissonance. Solid economic analysis when considering return on investment are best served cold and dispassionate from independent parties with no vested interests are usually the safest and the best forms of information.

“Dissonance by definition: psychological conflict resulting from incongruous beliefs and attitudes held simultaneously”

Submitted by Ken Peters PhD, Principle Analytic Medtek Consultants and Professor of Economics Baruch College, CUNY. Acknowledgements to Alex Nussbaum PhD, Professor of Statistical Psychology, St. Johns University

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