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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA
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To: Alex MG who wrote (16069)2/5/2003 10:46:28 AM
From: macavity  Read Replies (1) of 19219
 
Probability.

I always laugh at this 3 yr 4 yr thing.

The probability that people should be looking at is not
The probability of 4 down years - p(4Down)
But should be
The probability of 4 down years, given that we have already had three of them - p(4Down|3Down)

Now technically there is actually not enough information for this to be calculated, but the number of 4 year down periods in the last 100 or 200 years is not the answer.

If we consider the 2 following
N(3 down years) - Number of only 3 down periods in sample
N(3+ down years) - Number of more than 3 down periods in sample

probability ~ N(3+ down years)/{N(3 down years)+ N(3+ down years)}
=>

both probabilities are actually small.

The (Baynesian) conditional probability is actually a lot larger than people intuitively think.

-macavity
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