The Probability of Coincidence

If you go over to Tim Sykes's site, you'll see a blog over there about Hemispherx Biopharma (HEB). The attention this blog has attracted is quite amusing. In summary, a bunch of people are accusing Tim of being cohoots with Adam F. of TheStreet.com. Why do they think this? Well, Adam came out with an article slamming HEB at 8 AM EST. Tim sent out a TIMAlert to his subscribers at 10:20 AM EST that he had shorted HEB. Adam's article was reposted around this time, making some people think that Adam and Tim were involved in some type of well-timed conspiracy to bring down HEB and to cause the huge tank that was seen on Friday.

Of course, this is all just coincidence, but it shows people's tendencies to read way more into things than what are usually there. In fact, it is a well documented that humans underestimate the probability of things happening by coincidence. It is this human tendency that causes people to believe in conspiracy theories such as the fake moon landing, the JFK assasination, or the idea that 9/11 was an inside job.

Coincidental events, even strange or incredible ones, are actually quite common. This is easily illustrated by the birthday paradox. The birthday paradox shows how, if you have a group of randomly selected people, the probability that two of those people will have the same birthday is quite high. In a room of 23 people, the probablity is over 50%. In a room of 57 people, the probability is over 99%. Thus, if you're in a room with a lot of people and you meet someone with the same birthday as you, there's no inner or hidden meaning behind it....it's just basic probability at work.

Given that there are 5 billion people on this planet, and that there are billions of various events that occur, and that there are 5 million minutes in a 10 year period, it is bound that coincidences, even amazing ones, will happen quite often. In fact, the most incredible coincidence would be if there were no coincidences.

When it comes to the Tim HEB situation, it's obvious that everything that happened was just a coincidence. This is definitely a case where Occam's Razor applies. The simplest explanation, consistent with all the facts, is the most likely explanation. What is more probable here? That Tim & Adam are part of some well-timed conspiracy to bring down HEB? Or that HEB had a big run-up and just attracted a lot of attention from traders, two of which happened to write about it? Obviously, given the thousands of traders out there, and the fact that some of them are writing/blogging, the probability of a coincidental event is quite high....particularly with a stock like HEB that had run up so far so fast and has attracted a lot of attention.

If you believe the logic of the conspiracy theorists, then that would mean that anyone who shorted HEB on Friday and happened to mention it on the internet to other traders could've been part of the conspiracy. I shorted HEB multiple times on Friday. If I had tweeted that I had shorted HEB, would this mean that I was part of a conspiracy too? Often you can see the absurdity of conspiracy theories just by critically examing them. In fact, most conspiracy theories show their absurdity by examining the sheer number of people that would often have to be involved....logic dictates that large conspiracies are nearly impossible given that the more people that are involved, the more likely the whistle will be blown and the conspiracy will fail before it ever gets off the ground.

This relates to my past blog where I wrote how humans often see patterns where there are none. My next blog post will be about another human tendency....the tendency to remember "hits" and forget "misses"....I'll talk about how this creates psychological bias and how it relates to trading.