Accuracy vs. Precision
I once attended a conference about portfolio construction. Don’t fall asleep yet. Please. Give my life some meaning. I promise I’m going somewhere with this.
Still here….thanks. To explain the concept of risk, one of the presenters had a simple question. While you’re at this conference, how often will you call your significant other, once daily for 10 minutes or once for 3 hours? For the securely attached this is an easy question. Of course, you call them every day, even for a minute. But for those of us still getting a hang of this relationship thing we were struggling. This was a conference for financial professionals after all(read finance bros and brosettes). But the answer was simple: call them every day for 10 minutes.
Just like a good portfolio that should give a certain return consistently rather than periods of extraordinarily abnormal returns. That is what risk is, after all, the variability of returns.
This reminded me of a concept we learned in physics in high school. It involved the concept of accuracy vs. precision in experimental design. In an experiment, a scientist can achieve results that are similar to each other(precision) rather than achieving the “right” result every once in a while(accuracy). The better option is always precision because it’s easier to figure out what to fix when results are near each other so that when you do achieve the accuracy you can achieve it more consistently. This is the same idea underpinning good portfolio management and not shockingly good relationship building and communication. The figure below gives a solid overview of this idea.
This simple idea having a basis in a number of disciplines and facets of our lives suggests something about life and how to tackle any problem that requires consistently achieving a certain goal.
This blog will attempt to examine all the examples of these concepts that stretch across disciplines. Where these ideas may intersect is what we might call the central finite curve(for my fellow Rick and Morty fans).
