Is a new salesperson who manages to land a big deal a good salesperson? Is a new CEO skilled if the company shows a larger profit than before? Is the majority of the customers satisfied if you meet four very satisfied customers in the same week? Is there a connection between the share price of a company and the weather? Or does it all depend on chance?
Statistics can feel theoretical, boring, and unnecessary. It can feel that way especially if you already have a strong gut feeling how you want to act in a certain business situation or in your own life. You might think that you see a pattern in how, for example, a market acts or how share prices rise or fall. Is a statistical analysis really needed then?
The core question is what is a pattern and what is a random sequence? Nobel laureate Daniel Kahneman has exemplified this problem. He uses children born in a hospital as an example. The order in which a boy or a girl is born is completely random. For example, it is not possible to predict whether a boy or a girl will be born based on the outcome of the births in the last few hours. It is also quite the same probability that a boy is born compared to that a girl is born (from now on I assume that it is exactly the same probability to not complicate the reasoning unnecessarily).
If we study the following three sequences, where B stands for boy and G stands for girl:
Which of these sequences of births is most likely?
The answer is that they are just as likely! Intuitively, one would like to think that the last sequence is most likely because it “looks most random”, but all the sequences are equally likely. For example, since each birth is completely independent of the previous births, it is not possible to predict whether a boy or a girl is likely to be born after the sequence of six girls in a row, as in the second sequence above.
We humans have an inherent ability to look for patterns in what is happening around us. We also tend to underestimate how long sequences are actually created by completely random events. Our intuition simply tells us that random events should be much more evenly distributed than they actually become in reality. This can lead us to see imaginary patterns in events that are actually completely random.
In order to be able to assess how the world around you is changing, you sometimes have to look for trends that can affect your own company or perhaps your own life. Sometimes, however, it is not trends you see but random events that interact. It is difficult to completely avoid falling into the trap of seeing patterns in random information, but one should be vigilant and sometimes it can be an advantage to use statistical methods to assess the situation.