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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Comments on “Winning By Losing”

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Ed says:

I don't think this will work in the stock market..

…at least not for small investors. Churn your entire portfolio every day? Commissions will be pretty painful.

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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