The following is a financial scam. Your job is to tell me how it was pulled off.
On January 1, you receive an email from an investment counselor. Mr. Dewey wants to manage your stock portfolio and make you rich. There is a fee, of course, but he absolutely guarantees that he has a system that will, without fail, predict the direction of the stock market for the month of January.
He says he understands that he has to convince you of his ability, so he does not want any money just yet. And, by the way, the stock market will go up this month.
His prediction comes true. The stock market is up for January.
On February 1, you receive another email with a stock market prediction that comes true.
He repeats the feat for March. Then April, May, and June.
Mr. Dewey has correctly predicted the stock market’s direction for six consecutive months. Now, of course, he wants some up-front cash to manage your stocks.
Pretty impressive, right? How did he do it?
(Please spoilerize your answers so as not to spoil the fun)
Half the marks he predicts the market will go up, half he predicts will go down. Next month, make predictions only to those who got the up prediction. Same thing half up, half down. rinse and repeat until you have a pool of 4-6 in a row correct. Fleece.
[spoiler]He starts with a few hundred, or a few thousand, names and addresses. He sends half of them a prediction that the market will go up in January, and to half of them he predicts it will go down. He follows up with whichever group turns out to have gotten the correct prediction, divides that group in half, and again sends different predictions.
At the end of six months, there will be a lot of people who have forgotten about him entirely, and a few who received all correct predictions. They send him money to manage their investments, but his track record is no better than flipping a coin.[/spoiler]
FWIW, this is also known as the classic sportsbook scam. At the beginning of the season you send out a zillion letters saying “The Mets will [win/lose] their first game! Sign up now for our Super Sekrit Betting Tips!” Then the next day you send out more letters to whoever you sent the batch to with the correct prediction, and so on, until you get to the World Series and you’ve got a dozen guys who will hand over their entire life savings.
Since the kitty is pretty much out of the bag, I’ll post the answer.
Mr. Dewey gets a list of names and addresses of investors that is a power of 2. Let’s say 2 to the 15th = 32,768. He needs a power of two so he can divide the list repeatedly.
He splits the address list in two.
He emails one list a prediction that the Dow will fall, the other a prediction that the Dow will rise.
At the end of the month, he discards the names that got an incorrect prediction, and repeats from step (2) above.
At the end of six months, Miracle Man has a list of 256 names, each of whom has gotten a series of six miraculous predictions that could have netted the recipients a very nice return if they had moved in a timely way.
There was an Aussie race scammer who used to do this regularly. But his best trick was on the 1936 Melbourne Cup. It is hard for people overseas to understand how big an event it is in Australia. All the newspapers print lists of the runners designed to be cut up and used in Sweeps. Most workplaces will conduct several.
The scammer decided that Wotan would win the Cup and it was 100/1. So he set up a winner takes all sweep and told everyone that entered that they had drawn Wotan. He then put all their money on Wotan. He received 101 pounds for every pound he invested and probably only paid the winners 30 odd. But they would have been happy because they won on the Cup Sweep.
In a sweep the horse odds don’t matter, it’s how many horses that matter.
Say there are 30 horses in the race. Everyone in the office pays a quid and draws a horse out of a hat. The holder of the winning horse gets the kitty of £30.
What this guy apparently did was to tell everyone that they drew the same horse, and put all the £1’s on that horse at a bookie. If the horse loses no one expects any money, if it wins they only expect the £30, so he has a big upside and no real downside.