## Perspective, Probability, and Price

Today I received this email from my 3rd party study material provider for Level III. My amygdala suggested I make a half-attempt to hide their info as my failure might reflect poorly on them, so I’ve complied. In reality, they provided me with more study material than I made time to use.

The text in red answered a question I’d pondered with my wife just hours earlier. Were the roughly 50% that passed Level III this year basically the 50% that failed it last year?!

That really got me thinking about the probabilities involved here. Level III candidates are not slackers, and yet half of us failed. It’s not because we didn’t study!

The following data is from the CFA website…

So, if you assume the prior years’ pass rates will be the same going forward. The probability of passing all 3 exams on the first try on the 3-yr plan is:

`.46 x .39 x .51 = .092, or a 91% chance that you'll fail at least 1 along the way`

The probability of passing all 3 exams on the first try on the accelerated 2.5 year plan is:

`.34 x .39 x .51 = .068, or a 93% chance that you'll fail at least 1 along the way`

Or looking at this another way, we can see how our odds might improve for passing should we keep coming back year after year to take the same blasted test until we pass. Using the long-term 1963-2011 average pass rate (for all levels)…

```Probability of Failing a CFA exam = 53% Probability of Failing a CFA exam twice = .532 = 28%```

Taking the complement of the above, I see how our fearless leader from the aforementioned 3rd party organization may have arrived at his 70-80% figure. And continuing on…

```Probability of Failing a CFA exam thrice = .533 = 15% Probability of Failing 4x = .534 = 8% Probability of Failing 5x = .535 = 4%```

I’m of course assuming independence from one exam to the next, but the bottom line is that the program is as much a War of Attrition, as one newly minted Level III candidate called it, as it is a Financial IQ test!

You’ve just gotta expect to fail a level or two, and you’ve just gotta keep dusting yourself off and coming back.

And please don’t estimate the cost of pursuing the CFA as the sum of the 3 registration fees for the 3 exams like I did. You’re likely to also arrive at your destination 3 years late and 120% over budget!

Update: I finally passed all the CFA exams and wrote an eBook about the program. If you’re interested, click here.