The Tyranny of Screening Tests: From Medicine to Investing

A few months back I had written a post on Benford’s Law. It’s a fraud detection method to estimate if a given financial statement could be fake. In other words, it tells you if the numbers in a document are cooked up or real. When I first learned about Benford’s Law, I was like a kid with a new toy. I wanted to play with it immediately. Being a programmer, I wrote a small piece of code to extract the numbers from an annual report and test those numbers against Benford’s rule.

The next logical thought was to use my code and run it on the annual reports of all the publicly listed companies. This way, I could immediately identify all the companies which could be faking numbers. Wouldn’t that be cool? For some time, I even dreamed of floating a startup with this killer fraud detection product. I was going to be rich.

Now, instead of building my million dollar startup, I am writing this post. That should already give you a hint how that story turned out.

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