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Pastimes : Let's Talk About Our Feelings!!! -- Ignore unavailable to you. Want to Upgrade?

To: Dayuhan who wrote (35955)	4/26/1999 3:11:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 108807

Steven, let me present a concrete case of what I am talking about. Since everyone here is involved in the stock market to some extent, I will use a stock market simulation to illustrate the point. Suppose I were to ask the question: what is chance of having 7 out of 8 consecutive up trading days in a stock in one year if there is no correlation between individual price movements? I'll bet that most people would say it is quite small. Yet, the probability of the event is a virtual certainty. First we need to figure the probability that we will have 7 out of 8 up days in a given 8 day period. I assume there is a 50-50 chance of moving in any direction. The solution is easy. It is 8*.5^8 = 3.13%. But now comes the harder part. What is the probability of finding at least 1 of these runs in a year. To do this we need to invert our thinking. We ask what is the probability of not getting a 7 out of 8 day up run, and the answer is 100% - 3.13% = 96.88%. But now, we need to figure the probability of this "null event" occurring in every 8 day period in a year. If we say that there are 250 trading days in a year, then there are 243 consecutive 8 day periods in a year. Then the probability that none of them will be 7 out of 8 ups gives us .9688^243 = .0004, or .04%. Therefore the probability of at least one of these runs is 99.96%! Almost a dead certainty. Yet this is the kind of observation that TAers dote on. You find the same error made in sports, popular medicine, astrology, conspiracy theories, etc. TTFN, CTC