probability in the real world

Reflections on devising a ”probability in the realworld” course

David Aldous

22 May 2012

David Aldous The top ten things . . .

Textbook probability examples

Most textbook examples and questions are either “just maths” – X’s andY’s – or unrealistic little stories, for example

a. A student must choose exactly two out of three electives: art, French,and mathematics. He chooses art with probability 5/8, French withprobability 5/8, and art and French together with probability 1/4. Whatis the probability that he chooses mathematics? What is the probabilitythat he chooses either art or French?

b. A restaurant offers apple and blueberry pies and stocks an equalnumber of each kind of pie. Each day ten customers request pie. Theychoose, with equal probabilities, one of the two kinds of pie. How manypieces of each kind of pie should the owner provide so that the probabilityis about .95 that each customer gets the pie of his or her own choice?

c. Take a stick of unit length and break it into two pieces, choosing thebreak point at random. Now break the longer of the two pieces at arandom point. What is the probability that the three pieces can be usedto form a triangle?


d. Suppose you toss a dart at a circular target of radius 10 inches. Giventhat the dart lands in the upper half of the target, find the probabilitythat

1 it lands in the right half of the target.

2 its distance from the center is less than 5 inches.

3 its distance from the center is greater than 5 inches.

4 it lands within 5 inches of the point (0, 5).

e. You are in a casino and confronted by two slot machines. Eachmachine pays off either 1 dollar or nothing. The probability that the firstmachine pays off a dollar is x and that the second machine pays off adollar is y . We assume that x and y are random numbers chosenindependently from the interval [0, 1] and unknown to you. You arepermitted to make a series of ten plays, each time choosing one machineor the other. How should you choose to maximize the number of timesthat you win?


I claim to be the world expert in . . . . . .

As a hobby I have read and reviewed every (around 100) non-technicalbook on probability I’ve found. Many focus on specific topics (sports;stock market). Those that tackle “probability in general” fall into twoopposite styles.

Textbook lite works, which seek to teach a little math while recountingthe more interesting parts of undergraduate courses plus popular topicssuch as the Monty Hall problem.

Popular science without math, treating historical development andfashionable modern topics.

Representative examples of each genre areJeffrey Rosenthal: Struck by Lightning: the curious world of probabilities

Leonard Mlodinow: The Drunkard’s Walk: How Randomness Rules OurLives.

But . . . neither style works as a college course.


My Berkeley course consists of 20 lectures, on topics chosen to bemaximally diverse. Here are my desiderata for an ideal topic.

It is appropriate for the target audience: those interested in therelation between mathematics and the real world, rather than thoseinterested in the mathematics itself.

There is some concrete bottom line conclusion, which can be said inwords . . .

. . . but where mathematics has been used to derive conclusions . . .

. . . . . . and where mathematics leads to some theoretical quantitativeprediction that I or my students can test by gathering fresh data.

There is available “further reading”, both non-technical andtechnical, that I can recommend to students.

Very few topics permit all this, so the actual lectures fail to attain theideal!

Here are the topics from 2011, and student feedback “like minus dislike”.


(22) Psychology of probability: predictable irrationality(18) Global economic risks (*)(17) Everyday perception of chance (*)(16) Luck(16) Science fiction meets science(14) Risk to individuals: perception and reality(13) Probability and algorithms.(13) Game theory.(13) Coincidences and paradoxes. (*)(11) So what do I do in my own research? (spatial networks)(10) Stock Market investment, as gambling on a favorable game (*)(10) Mixing and sorting(9) Tipping points and phase transitions(9) Size-biasing, regression effect and dust-to-dust phenomena(6) Prediction markets, fair games and martingales (*)(6) Branching processes, advantageous mutations and epidemics(5) Toy models of social networks (*)(4) The local uniformity principle(2) Coding and entropy (*)(-5) From neutral alleles to diversity statistics.


So that’s my manifesto. The rest of this talk will be 8 illustrations ofwhat I actually do in the lectures.

My students are mostly Stat majors – no Math majors. They have takena first course in math probability and in math statistics. About half ofthem have taken/are taking/will take our courses in Stochastic Processesand Game Theory (and other Stat courses).

Re math, I try to(i) quote textbook results(ii) do back-of envelope style calculations on the board

rather than develop any theory. And the main objective – like a NewYear’s Resolution that’s hard to keep – is to talk only about topics forwhich we can get actual data.


Illustration 1. I mostly avoid “standard topics” but the birthdayproblem is such a paradigm example . . . . . . . I emphasize two points.

(a) We can readily get data, e.g. 30 realizations of the form [next slide]

(b) The conclusion is surprisingly robust to assumptions; “23” arises as0.5 + 1.18/

√∑i p

2i for pi ≡ 1

365 . What happens if (hypothetically)pi = 4

3 ×1

365 for half the days and = 23 ×

1365 for the other half?

Answer: “23” becomes “22”.

(c) Can we find data to test the non-uniform prediction?Student project. Canadian professional ice hockey players!


The Official Site of The Toronto Blue Jays: Team: Active Roster http://newyork.yankees.mlb.com/team/roster_active.jsp?c_id=tor

1 of 1 4/4/08 11:16 AM

Roster

Blue Jays Roster

Active Roster

40-Man Roster

Depth Chart

Search

Coaches

Transactions

Injuries

Draft Results

Front Office

Broadcasters

Minor League Affiliates

Player Search

Go

Select a TeamSelect a Team

Go to a player's page by moving

the cursor over a position and

clicking on a player's name.

40-Man Roster | Depth Chart

Active Roster

Pitchers B/T Ht Wt DOB

49 Jeremy Accardo R/R 6-2 190 12/08/81

34 A.J. Burnett R/R 6-4 230 01/03/77

37 Scott Downs L/L 6-2 190 03/17/76

54 Jason Frasor R/R 5-10 170 08/09/77

32 Roy Halladay R/R 6-6 225 05/14/77

22 Brandon League R/R 6-3 190 03/16/83

51 Jesse Litsch R/R 6-1 195 03/09/85

28 Shaun Marcum R/R 6-0 185 12/14/81

29 Dustin McGowan R/R 6-3 220 03/24/82

56 Brian Tallet L/L 6-7 220 09/21/77

59 Randy Wells R/R 6-3 230 08/28/82

40 Brian Wolfe R/R 6-3 220 11/29/80

Catchers B/T Ht Wt DOB

20 Rod Barajas R/R 6-2 230 09/05/75

9 Gregg Zaun S/R 5-10 190 04/14/71

Infielders B/T Ht Wt DOB

11 David Eckstein R/R 5-7 175 01/20/75

2 Aaron Hill R/R 5-11 195 03/21/82

6 John McDonald R/R 5-11 185 09/24/74

17 Lyle Overbay L/L 6-2 235 01/28/77

19 Marco Scutaro R/R 5-10 185 10/30/75

Outfielders B/T Ht Wt DOB

21 Buck Coats L/R 6-3 195 06/09/82

15 Alex Rios R/R 6-5 195 02/18/81

24 Matt Stairs L/R 5-9 220 02/27/68

23 Shannon Stewart R/R 5-11 210 02/25/74

10 Vernon Wells R/R 6-1 225 12/08/78

Designated Hitters B/T Ht Wt DOB

35 Frank Thomas R/R 6-5 275 05/27/68

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Illustration 2: Martingales and prediction markets.

In textbooks, martingales are a “non-elementary” topic, treated as mathwithout any data.I want to start with data.


In 17 baseball games from 2008 for which we have the prediction marketprices as in Figure 1, and for which the initial price was around 50%, theprices (as percentages) halfway through the match were as follows.

07, 08, 26, 26, 32, 33, 43, 43, 48, 54, 66, 73, 76, 80, 85, 86, 96

The average of these 17 numbers is fortuitously very close to 50, which(by the martingale property) is the theoretical expectation of halftimeprice.

These figures look roughly uniform on [0, 100] – is there an explanation?


Consider the point differences Z1 and Z2 in the first half and the secondhalf. A fairly realistic model is to assume(i) Z1 and Z2 are independent, with the same distribution function F ;(ii) their distribution is symmetric about zero.For simplicity we add an unrealistic assumption(iii) the distribution is continuous.Under these assumptions, the chance the specified team wins, given thefirst half point difference is z , is

P(Z1 + Z2 > 0|Z1 = z) = P(Z2 > −z)

= F (z) by symmetry

and therefore the conditional probability of winning at halftime is

P(Z1 + Z2 > 0|Z1) = F (Z1).

But as a textbook fact, for a continuous distribution it is always true thatF (Z1) has uniform distribution.


Romney for Republican presidential nominee.


Palin for Republican presidential nominee.

Widely believed that the number of candidates whose prospects haverisen and fallen is unusually large. Is it really?Theory: If each candidate’s initial price (% chance) is < x then themean number of candidates whose price ever exceeds x equals 100/x .


Data: Maximum price (so far) for each candidate.Romney 98Perry 39Gingrich 38Palin 28Pawlenty 25Santorum 18Huntsman 18Bachmann 18Huckabee 17Daniels 14Christie 10Giuliani 10Bush 9Cain 9Trump 8.7

Paul 8.5

Conclusion: Only slightly more than expected.


actual bet


Illustration 3: Paradoxes, helpful and unhelpful.Many of the standard paradoxes, e.g. the two envelopes problem,strike me as too unrealistic to be taken seriously. Conversely, there aremany “paradoxical” phenomena that are both interesting and havereal-world significance. For instance

A bet that is advantageous to both parties. In February 2012, I(resident in the U.S.) and my friend Sir Jonathan (resident in the U.K.)agreed that there is a 50-50 chance that, one year ahead in February2013, the pound/dollar exchange rate will be on either side of 1.60dollars per pound. (The figure didn’t matter, just that we agreed on thefigure). We then made a bet:


If 1 pound is at that time worth more than 1.60 dollars then he will payme 1 pound; if not then I will pay him 1.60 dollars.

So what will happen?

From his viewpoint he either loses 1 pound or wins an amount thatby definition is worth more than 1 pound;

from my viewpoint I either lose 1.60 dollars or win an amount thatby definition is worth more than 1.60 dollars;

and since we agreed it was a 50-50 chance, to each of us this is afavorable bet.


Illustration 4: The Kelly criterion marks the borderline betweenaggressive and insane investing.

I focus on long-term investment. Imagine you inherit a sum of money atage 25 and you resolve to invest it and not start spending it until age 65.We envisage the following setting.(i) You always have a choice between a safe investment (pays interest, norisk) and a variety of risky investments. You know the probabilities of theoutcomes of these investments. [of course in reality you don’t knowprobabilities – unlike casino games – so have to use your best guessinstead].(ii) Fixed time period – imagine a year, could be month or a day – at endyou take your gains/losses and start again with whatever you’ve got atthat time (“rebalancing”).

The Kelly criterion gives you an explicit rule for how to divide yourinvestments to maximize long-term growth rate.


To illustrate, imagine day-trading scheme with stocks based on somestatistical non-randomness; within one day51% chance to double money; 49% chance to lose all money.Looks good – expected gain 2% per day – but don’t want to risk all yourmoney on one day. Instead use strategy: bet fixed proportion p of moneyeach day. Theory says: long-term growth rate, depends on p, but in anunexpected way.

0.02 0.04

210,000

growth rate

p

Optimal strategy: bet p = 2% of your capital each day; this providesgrowth rate 2

10,000 per day, which (250 trading days per year) becomes

5% per year.


The numbers above depended on hypothetical assumptions. But theconceptual point is completely general. We are not assuming you canpredict the future, just that you can assess future probabilities correctly.Provided there is some risky investment whose expected payoff is greaterthan the risk-free payoff, the Kelly criterion is a formula that tells youhow to divide your portfolio between different investments.

There’s one remarkable consequence of using this strategy. To get themaximum possible long-term growth rate, using “100% Kelly strategy”,you must accept a short-term risk, of the specific form

50% chance that at some time your wealth will drop to only 50% of yourinitial wealth.

And 10%− 10% too! Of course, if not comfortable with this level of risk,you can use “partial Kelly strategy” combining with risk-free assets.


This story is told in the popular book Fortune’s Formula by WilliamPoundstone. Maybe nothing in this story seems intellectually remarkable,but in fact something is. Consider an analogy: the light speed barrier.

[Common sense says objects can be stationary or move slowly or movefast or move very fast, and that there should be no theoretical limit tospeed – but physics says in fact you can’t go faster than the speed oflight. And that’s a very non-obvious fact. ]

Similarly, we know there are risk-free investments with low return; bytaking a little risk (risk here equals short-term fluctuations) we can gethigher low-term reward. Common sense says this risk-reward trade-offspectrum continues forever. But in fact it doesn’t. As a math fact, youcan’t get a higher long-term growth rate than you get from the “100%Kelly strategy”.


Some data . . . . . .

0 50 60 70 80 90 100

Figure 2. Historical distribution of the minimum future value of a 100

investment. Based on hypothetical purchase of S&P500 index on first day of

each year 1950-2009 and on subsequent monthly closing data.

This is hardly uniform on [0, 100].


IFA plot. Note 50 years.


Illustration 5: How do people think about chance in everyday life?

There are many ways one might study that question, for example bysearching blogs to examine casual usage of specific words or phrases. Iwill show results of examining a sample of queries submitted to thesearch engine Bing containing the phrase ”chance of” or ”probability of”.We manually examined about 1,000 queries, retained those where theuser was seeking to discover the chance of something, and sorted these675 retained queries into 66 groups (each containing about 10 queries) ofqueries on some similar topic. I then chose one representative query fromeach of these groups. All 66 are on my web page – below I show 30 ofthem, to indicate the range and frequency of topics that occur in suchsearches.

Can you guess which topics appear most often?

Do you think they will have much connection with typical textbooktopics?


Query: chance of pregnancy on pillQuery: how to improve chance of getting pregnantQuery: chance of getting pregnant at age 41Query: chance of getting pregnant while breastfeeding

Query: can you increase your chance of having a girlQuery: if twins run in my family what’s my chance of having them?

Query: does a father having diabetes mean his children have a 50%chance of getting diabetesQuery: chance of siblings both having autism

Query: chance of miscarriage after seeing good fetal movement heartbeatat 10 weeksQuery: chance of bleeding with placenta previaQuery: any chance of vaginal delivery if first birth was ceaserian


Query: probability of having an adverse reaction to amoxicillinQuery: does hypothyroid in women increase chance of liver cancer?Query: does progesterone increase chance of breast cancerQuery: which treatment has the least chance of prostate cancerrecurring?Query: what is the chance of relapse in a low risk acute lymphoblasticlukemia patientQuery: chance of getting a brain tumor


Query: probability of flopping a set with pocket pair in pokerQuery: does a ring of wealth affect the chance of the dragon pickaxedrop in runescape?

Query: chance of surviving severe head injury

Query: chance of snow in Austin TexasQuery: is there chance of flood in Saint Charles, Illinois today?

Query: calculate my chance of getting to university of washingtonQuery: what are the chance of becoming a golf professional


Query: chance of closing airports in Mexico because of swine flu

Query: any chance of incentive packages for government employees toretire

Query: chance of children of divorce being divorcedQuery: chance of food spoiling if left out over night

Query: what does it mean 50/50 chance of living 5 yearsQuery: probability of life and evolution


A quick rant90 years of bad teaching of freshman Statistics, and shorthand like “thedata is statistically significant”, has led to the widespread blunder ofthinking that statistical significance is an attribute of observed data; ofcourse it’s really an attribute of the hypothetical probability model thatmay or may not be generating the data.

I suspect this all started with the bad choice of using the same words(mean, s.d., etc) for data and for models.

Illustration 6; from the lecture on entropy and data compression.For any probability distribution p = (ps) = (p(s)) on any finite set S , itsentropy is the number

ent(p) = −∑s

ps log2 ps .


Suppose, from a library of about one million books, you pick one bookuniformly at random and write out the entire text of that book. What isthe entropy of what you write?

Answer [according to our definition]: 20 bits.

On the other hand, widely claimed “entropy of English language is about1.3 bits per letter”, so the text of a book with 300,000 letters shouldhave entropy about 400,000 bits.

Point (again): there is a distinction between actual data andhypothetical probability models by which the data might have beengenerated.

Here’s a less artificial example. From the Hall of Fame forback-of-an-envelope calculations.


password checker

Illustration 7: Toy models and bad science.


[ 21 ]

II.-A Mathematical Theory of Evolution, based on the Conclusions of Dr. J. C. Willis, F.R.S.

By G. UDNY YULE, C.B.E., M.A., F.KRS., University Lecturer in Statistics, and Fellow of St. John's College, Cambridge.

(Received June 11, 1923.-Read February 7, 1924.)

CONTENTS, Page Introduction . ..... . ..................... 21 Section.

I.-The increase in the number of species within the genus with time, and the frequency distribution of sizes of genera all of the same age ............ .... 33

II.-The limiting form of the frequency distribution for the sizes of derived genera when time is infinite .... ............... 37

III.-The frequency distribution for sizes of genera (derived and primordial) when time is finite 41 IV.-The fitting to data of the expression obtained in Section III ............. 51 V.-The frequency distribution of ages and the mean age, etc., for genera of a given size . . 64

VI.-An attempt to estimate the order of magnitude of the doubling-period for species in the case of the flowering plants, and the present rate of occurrence of specific mutations . 75

APPENDIX.-Tables A-E. ................................. 85

INTRODUCTION.

The following work is founded on that conception of evolution, the most recent and precise formulation of which is due to Dr. J. C. WILLIS,* and represents an attempt to develop the quantitative consequences of the conception.

By his statistical studies of distribution Dr. WILLIS was led to two conclusions :- (1) Species occupying large areas are, on the whole, older than those occupying small

areas, provided that allied forms are compared. It is to be noted that by the " area occupied" by a species is meant, not the total

acreage actually covered by individuals of the species in question, but the area of the contour drawn round its outermost stations-the " areal range" of the species as it might be termed.

(2) The larger genera, i.e., the genera with most species, are, on the whole, those occupying the larger areas.

The first is the conclusion which Dr. WILLIS briefly summarises as the principle of "Age and Area," the second as the principle of " Size and Space." From these statistical inductions the deduction follows, time being the ruling factor in both cases :

(3) The larger genera are, on the whole, the older. * 'Age and Area,' Cambridge University Press, 1922, and numerous papers therein cited published

during the past fifteen years. VOL. CCXIII.-B. 403. E [Published May 14, 1924.]


I regard it as self-evident that interesting aspects of the future areuncertain and therefore that forecasts, predictions, risks etc should beexpressed in probability terms. Of course I don’t have any magic way ofdoing this, but we can study how accurate other people’s predictionshave been.

Illustration 8: Accuracy of assessments of global economic risks

A cynical view of retrospective analysis of the late-2000s worldwidefinancial crisis is that commentators say either ”no-one saw it coming” or”I saw it coming”, depending on whether they can exhibit evidence of thelatter! Is such cynicism justified?

Each year since 2006 the OECD has produced a ”global risks” report forthe World Economic Forum annual meeting in Davos. The 2008 report,written in mid-2007 (at which time there were concerns about theworldwide boom in house prices, and some concerns about U.S. subprimemortgages, but nothing dramatic had happened in other markets) gave,as in other years, a list of ‘”core global risks”, summarized using the nextgraphic. The horizontal axis shows ”likelihood” and the vertical axisshows economic effect.


8

The 23 C ore Global Risks: Likelihood with Severity by Economic Loss

Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used.

Likelihood

Sev

erit

y (in

US

$)

below 1%

2-10

bill

ion

10-5

0 bi

llion

50-2

50 b

illio

n

1-5% 5-10% 10-20% above 20%

250

billi

on -

1 tri

llion

mor

e th

an 1

trill

ion

Retrenchment from globalization Asset price collapse

Fall in $Climate changeLiability regimesDeveloping world disease

Loss of freshwater servicesFailed and failing states

Proliferation of WMD

International terrorism

Oil price shock

Coming fiscal crises

NatCat: Tropical stormsNatCat: Earthquakes

NatCat: Inland flooding

Nanotechnology

Middle East instability

China economic hard landing

Transnational crime and corruptionBreakdown of CII

Chronic disease in developed countries

PandemicsInterstate and civil wars

Increasing consensus around risk


Definining risk as ”likelihood” multiplied by ”economic effect”, the 5most serious risks (as assessed in 2008) were

Asset price collapseOil price shockChina economic hard landingInter-state and civil warsBreakdown of civil informational infrastructure

The entry ”asset price collapse” was defined as

“A collapse of real and financial asset prices leads to the destruction ofwealth, deleveraging, reduced household spending and impairedaggregate demand.”

Given that these 5 risks were assessed to have 10-20% likelihood and thatone of them occured with even more than predicted severity, this OECDassessment is actually as good as one could hope for. Note that the ”oilprice shock” assessed as 2nd most serious did almost occur in 2008 butwas overtaken by the asset price collapse and did not have the severeimpact predicted – next graphic.


What’s my point? Interesting aspects of the future are uncertain, sowhatever forecasting/prediction you do, say it in probability terms.

With this in mind let us look at the corresponding graphic from the 2012report. Now the most serious risks (for the next 10 years) are assessed as

Chronic fiscal imbalancesWater supply crisesSevere income disparityFood shortage crisesExtreme volatility in energy and agricultural pricesRising greenhouse gas emissions


5Global Risks 2012

Figure 2: Global Risks Landscape 2012

3.0 3.5 4.0 4.5Likelihood

Impa

ct

3.0

3.5

4.0

4.5

Chronic fiscal imbalances

Chronic labour market imbalances

Hard landing of an emerging economyn

Major systemic financial failure

Recurring liquidity crises

Severe income disparity

Antibiotic-Antibiotic rresistant bacteriaesistant bacteria

Failure of climate change adaptationt

Irremediable pollutionLand and waterway use mismanagementg

Mismanaged urbanization

Rising grreenhouse gas emissions

Species overexploitation

Critical fragile statesca

Entn renched organized crime

Failure of diplomatic conflict d resolution

Global governance failua re

Pervasive entrenched corruptiono

TerTT rorism

Widesppread illicit tradea

Backlash against globalization

Food shortage crises

Ineffective drug policieseff

Mismanagement of population agingm

Rising rates of chronic disease

Unmanaged migration

Unsustainable population growthw

VVulnerability to pandemicsoulnerability to pandemics

Water supply crisesseW

Critical systems failuc re

Cyber attacks

Failure of intellectual property regime

Massive digital misinformationt

Mineral resouurrce supply vulnerability

Proliferation of orbital debris

Vulnerability to geomagnetic stormsag

Militarizationof space

Unintended consequences of nanotechnologyo

Unforeseen negative consequences of rregulationse

Unmanageable inflationor deflation

Unprecedented geophysicaldestruction

Diffusion of weapons off of mass destruction

Rising religious fanaticism

Persistent extpp

reme weather

Massive incident of as data fraud or theft

Unintended consequences eof climate change mitigation

Unintended

of new life science technologies

consequences

Unilateral resourcenationalization

Prolonged infrastructua reneglect

Extreme volatility in energy and agricultud re prices

Source: World Economic Forum


misc lists . . . . . .

List of student projects in 2011.

list of 15 actually verifiable predictions of theory

Wikipedia list of events that did not happen in 2011


probability in the real world

Documents

republican presidential nominee

top ten things

term growth rate

kelly criterion

david aldous

common sense

prediction markets

interesting aspects