Examples vs. Exceptions: The Danger of Drawing the Wrong Conclusions - 2019-11-08

We all know someone who loves to argue with anecdotes. Someone says smoking is bad for your health, and they immediately counter with an example: "My grandmother smoked every day from 17 until she was over 90!" I even heard a story from a friend, a cancer survivor, about how someone who smoked regularly lived a long life, while someone exposed to secondhand smoke developed cancer.

These kinds of stories are compelling because they're real. But they're also incredibly misleading. They're what statisticians call "corner cases" or examples from a tiny, insignificant sample size. They're exceptions, not the rule.

The problem is, we often let these exceptions cloud our judgment. We need to think critically and distinguish between what's normal and what's an outlier. If we base our decisions on exceptional outcomes, we're setting ourselves up for failure. It's like navigating with a broken compass – you might get lucky once, but you're more likely to end up lost.

Think about calculating the average net worth. If you include the top 1% richest people, their massive wealth will skew the average, making it seem like everyone is far wealthier than they actually are. The correct approach is to analyze that top 1% separately and then calculate the average for the remaining population.

Investing is a prime example of a field where examples and exceptions can be particularly dangerous. It's a blend of art and science, with no single "right" way and countless stories of overnight success (and devastating losses). That's why continuous learning is so crucial. It trains us to develop sound judgment and draw accurate conclusions, separating the signal from the noise, the typical from the exceptional. Without this critical thinking, we risk falling prey to misleading examples and making costly mistakes.