Adonis Diaries

Law of small numbers that looms large

Posted on: November 9, 2014

Law of small numbers that looms large

Suppose you own 100 stores in cities and in rural areas.

You hire a consultant to study the problem of shoplifting in your stores. The rates of theft compared to volume of sales show that shoplifting is highest in rural areas.

It turned out that the lowest rates are also located in the stores in rural areas. What gives?

In small stores, even a single theft looms large and the rates vary greatly.

If you order the rates according to size of stores, most of the shoplifting are in the vast middle, while the small stores occupy the tails of the curve.

It is not the location of the stores that is the deciding factor but their size.

If you read this caption “Start-ups employ smarter employees” be on your guard.

Start ups have small number of employees and their average IQ fluctuate far more than those employed by large companies.

Daniel Kahneman reveals that even experienced scientists succumb to the Law of small numbers: They tend to forget the random distribution law in their initial assessments.

Read: The Art of Thinking Clear

 

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