Sunday, October 19, 2008

The Blind Men and the Elephant and the Donkey

"Blind monks examining an elephant" by Itcho Hanabusa

Anyone doing medical research for more than 20 minutes soon learns that they can get wildly different results depending on just how they slice and dice their data. A wonderful example of this appeared a few days ago in the New York Times. Tommy McCall, former information graphics editor of Money Magazine, poses an intriguing question in his short op ed piece: Bulls, Bears, Donkeys and Elephants:
Since 1929, Republicans and Democrats have each controlled the presidency for nearly 40 years. So which party has been better for American pocketbooks and capitalism as a whole? Well, here’s an experiment: imagine that during these years you had to invest exclusively under either Democratic or Republican administrations. How would you have fared?
His conclusion, summarized in an impressive-looking graphic:
As of Friday, a $10,000 investment in the S.& P. stock market index would have grown to $11,733 if invested under Republican presidents only, although that would be $51,211 if we exclude Herbert Hoover’s presidency during the Great Depression. Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.
The implication is that the stock market has a very strong liberal bias. Your reaction to this is probably either "Oh, shit!!" or "Dude!!", depending on your political orientation. However, don't touch that dial.

An excellent follow-up post by Theodore Gray, co-founder of Mathematica, gives a quite different picture of this data. Gray created a wonderful interactive model to look at the same question, but using the Dow index (1897 - 2008) rather than the S & P. I downloaded it and had a ton of fun playing with it. Using the same assumptions as McCall, his initial model looks very similar:


However, what if one adds some very basic assumptions to the model? For example, many long term investors plow their stock dividends right back into buying more stock. If anything, this makes the Democrats look a lot better:


But wait, there's more.

What if we assume that it takes a while for a new president's policies to take effect? Not an unreasonable assumption, considering that one of the few things with a bigger turning radius than a Humvee or an aircraft carrier is the U.S. economy. What if we allow 12 months for this to happen? What if we also consider the effects of inflation and decide not to blame the whole darned Great Depression on the Republicans? The results now seem to vindicate the red staters:


But wait, there's still more!

And, you can read it in the final paragraph of Gray's article. The ending conclusion is too good to spoil here. I will say that I found it really comforting, considering current market conditions.

I guess that the old Sufi/Jainist/Buddhist/Hindu story of the blind men and the elephant is still just as relevant as ever. I'll leave the last word to American poet John Godfrey Saxe (1816 - 1887), who penned one of the best known versions of this tale. The final stanza of his poem says it all...
So oft in theologic wars,
The disputants, I ween,
Rail on in utter ignorance
Of what each other mean,
And prate about an Elephant
Not one of them has seen!

(via TheZorg)

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