Winning By Losing
from the it's-all-in-the-parrondo-paradox dept
If you've ever studied statistics, at some point or another you come across Simpson's Paradox which I always thought was pretty cool - and a good example of ways in which it's possible to "mislead" with statistics. Now, here's another interesting mathematical paradox called Parrondo's Paradox which involves two games with losing probabilities - but when played alternately gives you a winning probability. It's interesting to think through the math (if you feel like doing so) - and there are some implications for stock investing in some very specialized cases.
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I don't think this will work in the stock market..
It seems that the crux of this paradox is to avoid playing a game when you know its odds have temporarily turned unfavorable. Easier said than done in the real world: just sell before the market goes down -- all you need is a crystal ball to do that. Even adopting a random sell/re-buy strategy has problems aside from commissions and the tax mess it would create -- it softens the down side but it has the same moderating effect on the upside, too. So you'd have to employ it only when the market is in a downward trend, and switch to a different strategy when the market does well, but again, telling the difference between a daily blip and the beginning of a trend takes a fortune teller.
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