Profiting illicitly from chance

Skimming through a local newspaper the other day, I came across an advertisement for ‘investment advice.’ Basically, it was someone hoping to manipulate random chance to make a profit. It worked like this:

• You sign up and, for the next month, you get free weekly investment advice.
• You are encouraged to either invest according to the advice or pretend that you have done so, keeping track of the relevant stocks and how much you would have earned if you had invested.
• After the free trial period, you start paying a fee for further advice.

The system works in a pretty obvious way. The people running it either produce one weekly piece of advice or, if they are smarter, many. They then send this information to people at random. Naturally, some of the advice will lead to real or simulated losses. Those people will stop taking the advice. Some people, however, will receive seemingly good advice week after week. These people, impressed with the ‘track record’ of the financial advisors will presumably start paying for the information, perhaps giving up when things inevitably go wrong.

You could perform the same trick with any random and money-connected activity: betting on races or sporting events, commodity prices, and so forth. In every case, enough random sets of advice being distributed will lead to a subset of people winning on the basis of the ‘advice’ several times in a row.

At one level, this is a pretty simple confidence trick. At the same time, it isn’t hugely different from what a lot of legitimate financial firms do from day to day. Buying mutual funds, in particular, bears similarities. People evaluate funds based on their past performance, despite how that may have been the product of chance rather than good choices. At least some mutual funds will always do well, driving people to believe that money can be made with them. In fact, mutual funds are more insidious than the con described above. That is because they charge management fees. As a result, there are likely to be many circumstances in which fund managers are getting paid on a day-to-day basis for making trades that underperform the market.

Incidentally, a related trick could be performed with fake medicine: offer it to sick people for free, to begin with, then start selling it to the ones who happen to see their condition improve significantly for unrelated reasons during the ‘treatment’ period. This would work especially well with chronic conditions where the level of suffering varies significantly from one point in time to the next.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here. View all posts by Milan