Rock Breaks Scissors by Poundstone William

Author:Poundstone, William
Language: eng
Format: epub
Tags: Psychology / Cognitive Psychology, Business & Economics / Decision-Making & Problem Solving, Business & Economics / Finance
ISBN: 9780316228084
Publisher: Hachette Book Group
Published: 2014-06-03T00:00:00+00:00

Fairfield Sentry’s monthly returns were given to the hundredth of a percentage point. That means there are only two or three significant digits. Rounding discards information (or in this case, it means Madoff didn’t bother to invent the information in the first place). Despite that, it’s easy to see that Madoff’s monthly return numbers were unusual.

Let’s start with first digits, the test in which Benford’s law comes most into play. Nigrini recommends omitting negative values (or analyzing them separately), as the incentive is to minimize a loss. I’ve also omitted a few cases where there were fewer than two significant digits. That leaves 190 values, all two- or three-digit positive numbers. The bars show the actual first-digit tallies, and the line shows the ideal Benford distribution.

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