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July 21, 2008

Hedge Fund Job: Must Understand Benford's Law

Another guest post

The folks over at Valleywag are having fun with a Craigslist posting for a hedge fund job. In addition to looking for someone with all the typical quant skills, the ad asks applicants to do the following

1) Prepare a cover letter.
2) Flip a coin 50 times. Record the results on your resume as a sequence of heads (H) or tails (T) symbols.
3) Email your cover letter and resume to us.

Speculation abounds as to what the fund is getting at, but a few commenters suspect it's some sort of honesty test. The idea is that when people try to manufacture randomness on their own, they usually do a bad job. For example, a 25/25 split of heads/tails would be a dead giveaway that the applicant didn't to the assignment. The are other tells too that you could come up with.

An old NYT article explains what's going on, and how it relates to Benford's Law:

Dr. Theodore P. Hill asks his mathematics students at the Georgia Institute of Technology to go home and either flip a coin 200 times and record the results, or merely pretend to flip a coin and fake 200 results. The following day he runs his eye over the homework data, and to the students' amazement, he easily fingers nearly all those who faked their tosses.

"The truth is," he said in an interview, "most people don't know the real odds of such an exercise, so they can't fake data convincingly."

There is more to this than a classroom trick.

Dr. Hill is one of a growing number of statisticians, accountants and mathematicians who are convinced that an astonishing mathematical theorem known as Benford's Law is a powerful and relatively simple tool for pointing suspicion at frauds, embezzlers, tax evaders, sloppy accountants and even computer bugs.

Then again, maybe they're getting at something totally different. Any guesses?

Joseph Weisenthal is the proprietor of The Stalwart and a reporter at paidContent.org. You can email him at jnathan -at- gmail -dot- com or follow him on Twitter here.

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