Law of Large Numbers : Slide 8

Several things you really should remember and learn from this book are:

· We are dealing not with individual projects, but with a research and development process
· The more projects and the more types, the better
· The analysis tends to be independent of the technology or business
· Individual errors do not materially affect the overall outcome

A sociology instructor once said to me that he could not predict the individual, but he could predict the individuals in an aggregate set. We can see other similarities in the movie and insurance industries. Insurance companies decide in a demographic manner, the average death rate or the average expected age of a group, but can never ascertain the individual's statistics. The movie industry, such as Walt Disney®, must continue to put out movies, not knowing which will be successful and which will not. The R&D process is much more important than the actual product. As such, the analysis we advocate is inappropriate for single projects or small research efforts. The law of large numbers must hold. It is similar to a tossing of coins. We cannot tell the outcome of one coin, but flipping enough coins, we can predict what the aggregate outcome will be.

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