# Re: (no subject)

From: John Conover <john@email.johncon.com>
Subject: Re: (no subject)
Date: 3 Aug 2001 15:03:37 -0000

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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

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
48%.

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

John

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.

See:

http://www.johncon.com/john/correspondence/981014184454.18095.html
http://www.johncon.com/john/correspondence/981014210544.18525.html
http://www.johncon.com/john/correspondence/981014222823.18931.html
http://www.johncon.com/john/correspondence/981014233807.19309.html

for industrial market particulars, and:

http://www.johncon.com/john/correspondence/990215192020.29398.html
http://www.johncon.com/john/correspondence/990905134341.23530.html

for the US GDP. And,

http://www.johncon.com/ndustrix/FAQs.html#linux

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 http://www.johncon.com/ndustrix/.
>
>       John
>
> http://www.cio.com/archive/080101/cisco_content.html

--

John Conover, john@email.johncon.com, http://www.johncon.com/

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