Even Warren Buffett makes statistical errors

One person you wouldn't expect to hear tout a statistical fallacy is Warren Buffett, but the legendary investor appeared to do just that at the recent Berkshire Hathaway annual meeting, a reminder of just how easy it is to fall into statistical traps.

- Marty Fridson

While speaking at the annual meeting in early May, Mr Buffett commented while holding up a can of sugar-laden soda: “For 94 years I've been able to drink whatever I want to drink. They predict all kinds of terrible things for me, but it hasn’t happened yet ... Charlie [Munger] and I never really exercised that much or did anything — we were carefully preserving ourselves for these years?”

Mr Buffett has a deep knowledge of the insurance business. So we can be confident that he understands actuarial methods and probability theory better than his remarks suggest. But that might not be the case for everyone. While plenty of investors have prospered over long periods without the benefit of formal training in statistics, an inability to think probabilistically can lead to serious errors. Understanding a few of the field’s basic principles can help everyone avoid the most common financial pitfalls.

Assuming that Mr Buffett's longevity somehow negates the long-proven health benefits of diet and exercise is a clear statistical fallacy. It's like pointing to a 90-year-old who smokes three packs of cigarettes a day to disprove the correlation between tobacco use and longevity. In reality, both cases merely show that some people have exceptionally good genes.