How Western Electric rules mislead in statistical process control

The statistical model behind control charts for in-control processes is based on the assumption a Gaussian process with no autocorrelation (i.e. independent) with a constant mean and constant variance: in other words a white noise process. The various Western Electric rules try to find patterns that are not white noise, and thus show that the [...]

The bond trader’s fallacy

A few weeks ago one of us was sitting beside a retired bond trader at a luncheon. Both interlocutors being interested in probability and its applications in business, there ensued a disagreement about whether in a sequence of coin flips the flips were independent. The bond trader argued that anyone who believed they were not [...]

Lance Armstrong doping case and bond defaults show challenges of probabilistic reasoning

In an earlier blog post (here) we wrote that, given the evidence available to us at the time, Lance Armstrong was probably not guilty of doping. The main line of our argument was that hundreds of doping tests from certified laboratories using accepted procedures had not found dope. We restricted the evidence to this, in the [...]

Armstrong Affair shows USADA uninfluenced by measurement

The US Anti-Doping Agency says it has “overwhelming proof” seven-time Tour-de-France winner Lance Armstrong was cheating by doping himself with performance-enhancing substances. What is the evidence? Armstrong was tested for drugs perhaps hundreds of times during his cycling career. Every single test pronounced him clean. That is strong evidence against doping. According to the USADA, [...]

Investors beware: mining resource estimation methods give inconsistent results

After the Bre-X scandal in 1996, when fake measurements of gold wiped out billions of dollars in shareholder value of the Canadian mining company, the mining industry developed new standards for measuring mineral resources. While they are a vast improvement, the words and methods the industry uses to describe resources still leave room for the [...]

Why you cannot measure risk

In 2008, Collateralized Debt Obligations (CDO) that had been given very high ratings by the credit rating agencies collapsed. The rating agencies got blamed for faulty ratings. Once a mining association gave a coal mine the “Safest Mine Award.” One month later the mine blew up and killed 32 miners. The award is based on [...]

How statistical process control charts mislead

The statistical process control chart is designed to help differentiate between what are usually called “common” causes of variation and “special” causes. But this is very misleading. Typically, six-sigma consultants and various authors advise you to ignore data between control limits because it is “random.” They say to only make process adjustments when the process [...]

Can China’s credit rating agency do a better job than its rivals?

An AAA rating is not “wrong” because the security later defaults.

misLeading Indicators: How to reliably measure your business

Topics

Recent Posts

Recent Comments