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Arrange the given statements in the correct sequence as they appear in the passage. Kodak lost to its competitors a big pie of its market share, II Kodak ventured into chemical business to strengthen its digital technology business.

Kodak downsized its workforce drastically. Kodak tied up with business firms for photo processing. Because of this susceptibility, brokers or analysts who have had one or two stocks move up sharply, or technicians who call one turn correctly, are believed to have established a credible record and can readily find market followings.

Likewise, an advisory service that is right for a brief time can beat its drums loudly. One market-letter writer was featured prominently in the Sunday New York Times for being bearish in July of , as the market dropped rapidly.

A well-timed call can bring huge rewards to a popular newsletter writer. The next time around, everyone will listen to you. Elaine Garzarelli gained near immortality when she purportedly "called" the crash. Although, as the market strategist for Shearson Lehman, her forecast was never published in a research report, nor indeed communicated to its clients, she still received widespread recognition and publicity for this call, which was made in a short TV interview on CNBC.

What had been a point gain for the DOW turned into a point loss, a good deal of which was attributed to her comments. Only a few days earlier, Ms. Garzarelli had predicted The DOW would rise to from its then value of Even so, people widely followed her because of "the great call in He naturally tells potential subscribers that following his advice will make them mega-bucks.

According to the Hulbert Financial Digest, his advice has significantly under performed the market. The truth is, market-letter writers have been wrong in their judgments far more often than they would like to remember.

However, advisors understand that the public considers short-term results meaningful when they are, more often than not, simply chance.

Those in the public eye usually gain large numbers of new subscribers for being right by random luck. Which brings us to another important probability error that falls under the broad rubric of representativeness: Amos Tversky and Daniel Kahneman call this one the "law of small numbers. The statistically valid "law of large numbers" states that large samples will usually be highly representative of the population from which they are drawn; for example, public opinion polls are fairly accurate because they draw on large and representative groups.

The smaller the sample used, however or the shorter the record , the more likely the findings are chance rather than meaningful.

Yet the Tversky and Kahneman study showed that typical psychological or educational experimenters gamble their research theories on samples so small that the results have a very high probability of being chance. This is the same as gambling on the single good call of an investment advisor. The psychologists and educators are far too confident in the significance of results based on a few observations or a short period of time, even though they are trained in statistical techniques and are aware of the dangers.

Note how readily people over generalize the meaning of a small number of supporting facts. Limited statistical evidence seems to satisfy our intuition no matter how inadequate the depiction of reality.

Sometimes the evidence we accept runs to the absurd. A good example of the major overemphasis on small numbers is the almost blind faith investors place in governmental economic releases on employment, industrial production, the consumer price index, the money supply, the leading economic indicators, et cetera.

These statistics frequently trigger major stock- and bond-market reactions, particularly if the news is bad. For example, investors are concerned about the possibility of rising prices. If the unemployment rate drops two-tenths of one percent in a month when it was expected to be unchanged, or if industrial production climbs slightly more than the experts expected, stock prices can fall, at times sharply. Should this happen?

Flash statistics, more times than not, are near worthless. Thus, an increase in the money supply can turn into a decrease, or a large drop in the leading indicators can change to a moderate increase. These revisions occur with such regularity you would think that investors, particularly pros, would treat them with the skepticism they deserve.

Alas, the real world refuses to follow the textbooks. Experience notwithstanding, investors treat as gospel all authoritative-sounding releases that they think pinpoint the development of important trends.

An example of how instant news threw investors into a tailspin occurred in July of Preliminary statistics indicated the economy was beginning to gain steam. Many people, convinced by these statistics that rising interest rates were imminent, bailed out of the stock market that month. By the end of that year, the GDP growth figures had been revised down significantly unofficially, a minimum of a dozen times, and officially at least twice.

The market rocketed ahead to new highs to August , but a lot of investors had retreated to the sidelines on the preliminary bad news Just as irrational is the overreaction to every utterance by a Greenspan or other senior Fed or government official, no matter how offhanded. Like ancient priests examining chicken entrails to foretell events, many pros scrutinize every remark and act upon it immediately, even though they are not sure what it is they are acting on.

Remember here the advice of a world champion chess player when asked how to avoid making a bad move. His answer: "Sit on your hands. The law of small numbers, in such cases, results in decisions sometimes bordering on the inane. Which statement does not reflect the true essence of the passage I. Tvetsky and Kahneman understood that small representative groups bias the research theories to generalize results that can be categorized as meaningful result, and people simplify the real impact of passable portray of reality by small number of supporting facts.

Governmental economic releases on macroeconomic indicators fetch blind faith from investors who appropriately discount these announcements which are ideally reflected in the stock and bond market prices.

Investors take into consideration myopic gain and make it a meaningful investment choice and fail to see it as a chance of occurrence, IV Irrational overreaction to key regulators expressions is same as intuitive statistician stumbling disastrously when unable to sustain spectacular performance. The author of the passage suggests the anomaly that leads to systematic errors in predicting future.

Which of the following statement does not best describe the anomaly as suggested in the passage above I. The psychological pressures account for the anomalies just like soothsayers warning about the doomsday and natural disasters and market crashes. Investors are swamped with information and they react to this avalanche of data by adopting shortcuts or rules of thumb rather than formally calculating odds of a given outcome. The distortions produced by subjectively calculated probabilities are large, systematic and difficult to eliminate even when investors are fully aware of them A Only I.


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