Bad Science is a book by Ben Goldacre , Fourth Estate, London, 2008 and stems from a column he writes in the Guardian newspaper called Bad Science and you can read his blog at http://www.badscience.net. Mr. Goldacre writes about your health and what you should or should not believe. The last column showed some of the classic methods to ensure the data gives the result you want, the next points is why we continually believe the stupid things the marketing industry sends our way.

The reason is essentially most of us will not take every piece of data presented and examine it for all the flaws before we make a decision – we reason informally or by intuition or by rules of thumb that simplify problems for the sake for efficiency. This efficiency or convenience comes at a cost – it can be exploited and it is.

Randomness – as human beings we have an innate ability to make something out of nothing. We can spot patterns, but what happens if we spot a pattern where none exists? What if we are wrong in considering what the randomness should look like, what if we are not that good at it?

Regression to the Mean – if things are at the extreme, they are likely to settle in the middle.

The Bias Toward Positive Evidence – we tend to ask questions to reinforce or confirm our hypothesis. If the marketers are asking the first question, what result do you believe you are confirming?

Bias By Our Prior Beliefs – very few of us do not react to data based on what we think the result should be or we have a bias for a certain result.

Availability – our attention is always drawn to the exceptional and the interesting, and if you have something to sell, it makes sense to guide people’s attention to the features you want them to notice.

Social Influences –  our values are socially reinforced by conformity and by the company we keep. Communal reinforcement is the process which a claim becomes a strong belief, through repeated assertion by members of a community. In this fashion testimonials with communities can become more powerful than scientific evidence.

Linking to dividend paying stocks, the above are generic to all of us, we have flaws and the marketing industry of all companies use the above. Many times it is okay, which is why in retrospective many of us are brilliant. When presented with data, ask about how the data was collected and the exceptions, similarly when you receive the annual report – read the notes to see what the exceptions are. The other thing to do is to counteract the marketing people follow tried and true methods of investing – profitable companies over time which pay a dividend. They lose less money on the downside and over time the combination of dividends and capital gains makes a great investment with low risk.

There are more questions than answers, till the next time – to raising questions.