Type I and Type II Charlatans

Type I and Type II Charlatans

Posted December 27, 2020 by Ben Carlson

Pockets of the market are flirting with silly territory.

SPACs, IPOs, and electric vehicle companies are all sprouting up like weeds.

I’m not intelligent enough to sort through the winners and losers in these areas but the fact that there are currently winners means there will be a flood of losers to follow. That’s how these things work. When speculative investments are in demand, the supply ramps up to meet it.

And many of those losers will be pushed relentlessly by hucksters and charlatans who flock to rising markets like me to a new Tom Cruise movie.

Charlatans tend to flourish when some or all of the following characteristics are present:

When there’s an “expert” with a good story

When greed is abundant

When capital becomes blind to risk

When individuals begin taking their cues from the crowd

When markets are rocking

When innovation runs rampant

There are two types of charlatans you need to watch out for when trying to avoid getting taken advantage of during these types of market environments.

When testing a hypothesis using statistics, there are two types of errors a statistician can make. A type I error is when you reject a null hypothesis that is actually true. A type II error is when you accept a null hypothesis that is actually false.

This meme is the best explanation of this concept I seen:

Type I charlatans are the visionaries who are more or less sincere but wind up ruining their investors anyway because they take their ideas to the extreme or fail to account for the unintended consequences of their ideas.

 These false-positive charlatans are so passionate that it becomes difficult for their victims to see any downside. When you combine intellect, passion, and people in search of money and/or power, it’s easy to become blinded to potential risks.

And once a Type I charlatan gets a taste of success, it’s tough to pull in the reins when things go wrong.

 To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2020/12/type-i-and-type-ii-charlatans/