Re: (no subject)

From: John Conover <>
Subject: Re: (no subject)
Date: 3 Aug 2001 15:03:37 -0000

Cisco did almost everything right. Almost. They had the correct
numbers. Where they went wrong was in their interpretation of the
numbers; they were using regression analysis as a forecasting model.

If you divide the average by the standard deviation of the marginal
growth in a market, add one, and divide that by two, that gives the
probability that a market is going to increase-according to entropic
economics and information theory. The average is the growth of the
market, and the deviation is a metric of the risk, (that's the way one
handles risk-reward.)

But one then has to evaluate the accuracy of the calculated
probability of a market increasing, too; the probability has to be
multiplied by 1 - 1 / sqrt (n), where n is the interval length used in
the regression study.

As fate would have it, it makes regression analysis inapplicable in
business models.

The probability that a market is going to increase is almost never
higher than 55%, measured on daily information. If a calendar quarter
is used as the interval for the regression, (that's about 60 business
days,) one has 0.55 * 1 - 1 / sqrt (60) = 0.55 * 0.87 = 0.48, or about

It is not wise to bet on less than 50% odds-but that's what Cisco did.


BTW, what should they have done? They should not have used regression
analysis. Since industrial markets are fractal, the 1 / sqrt (n) stuff
works on years, too. The Internet boom began, in earnest, in about
1995. By 1999 they should have been throttling manufacturing, since 1
/ sqrt (4) = 0.5, and 1995 + 4 = 1999. 2000 was when Cisco's problems
started. In short, they should have exploited the dynamics of the
data, instead of attempting to make sense out of it by smoothing.


for industrial market particulars, and:

for the US GDP. And,

is a series of internal e-mail where such concepts were used to
develop a strategic framework for a company. The company faired much
better than Cisco through the tecno-bust of late 2000.

John Conover writes:
> Attached is a very well written article on the demise of Cisco.
> Interestingly, IP addresses from Cisco are often found in the
> logs of
>       John


John Conover,,

Copyright © 2001 John Conover, All Rights Reserved.
Last modified: Fri Aug 3 11:24:07 PDT 2001 $Id: 010803080354.6258.html,v 1.0 2001/11/17 23:05:50 conover Exp $
Valid HTML 4.0!