Intuition Amplifiers 2
- Thread starter MAESTRO
- Start date
I regret they don't teach probability theory in elementary schools. I hardly understand Bayes with my master degree now. If I remember correctly, the key aspect of probabilities in Monty Hall paradox is not dilemma of changing decision by contestant, but the actual announcer's knowledge about real prize behind the gate he discards. The practical use of this paradox is that after you win 1$ you have 75% chance of winning another 1$, but the trick is that to make cash with consecutive rate you have to win your first 1$ with probability higher than 50%. But does it really matter? I'm not sure if one can effectively use any kind of probability game in environment of unkown mean and variance. Same with Parrondo and envelopes paradox: one way or another one must have proved advantage above transaction cost and statistical error. And there is secretary problem which applies to American options trading. Are there other methods to demonstrade MHP usage in stock market?
Sometimes what we see is not really there...
http://www.livescience.com/28911-7-ways-to-trick-your-brain.html
http://www.livescience.com/28911-7-ways-to-trick-your-brain.html
I did a similar study to #3 a while back, but with 5 minute bars on EURUSD or AUDUSD, 'what's the probability of making an 8th high in a row?' It worked out to some low number like 3% or 5%, so I thought, bet against it. The next question was which bar to bet against it, the 7th, the 5th, the 2nd, other? This led me to rephrase the question slightly to better match what I would see in real time, as 'of those that made 1 high, how many made 2 highs? of those at 2 highs, how many made 3 highs? ... of those at 7 highs, how many made 8 highs?' The result -- it looked like they all had the same probability, est. somewhere around 47%, of going on to the next consecutive high, so I reckoned, with statistical error from my crude sampling and study techniques, that's close enough it may as well be 50%.
I'd really like to know the answer to the classic questions, I'm interested to see how my study finding compares.
Yes, however, we are venturing here into a very sensitive area of a strictly proprietary research. All I can tell that a good friend of mine is running a very successful volatility arbitrage hedge fund using the MHP type of strategy. It uses options and option synthetics to create a stable vol arbitrage opportunity. I doubt that he would want to disclose anything about it though. And, of course, under any circumstances I would disclose my knowledge about his system. Having said that, I can honestly say that I see MHP at work every day as well as the Parrondoâs paradox that was also successfully implemented in the same trading strategy.
Your experience is bang on! The answer is 50%! I have conducted a huge and elaborate study on 100 different time frames, tick bars, volume bars etc. The probability is always 50%!
More so; if you normalize any chart using 1% step function you will get extremely close to fair coin based RW!
I have presented this study to Bank of America in 2007 and they have verified it for me using their internal quant group.
That is the knowledge that has prompted me to seek the answer elsewhere. And that is how I came up with Intuition Amplifiers.
In my opinion Maestro is trying to say that individuals fail with decision making because they do not realize counter-intuitive game-changing probabilities. This means crowd as a collective of people usually makes bad decisions and loses. If trader follows the crowd he loses also. Hence Maestro demonstrates RTM techniques and shows how to exploit that wrong crowd behavior by actually not following crowd but using momentum of fear and greed against that crowd. Just because crowd has huge power to move the market, it doesn’t mean that it behaves rationally. That’s why intuition amplifier is needed.
Neural impulses travel a million times slower than a computer's internal messages, yet our brain humbles any computer with its instant recognition. "You can buy a chess machine that beats a master," notes vision researcher Donald Hoffman, "but can't yet buy a vision machine that beats a toddler's vision." If intuition is immediate knowing, without reasoned analysis, then perceiving is intuition par excellence. So, is human intelligence more than logic? Is thinking more than ordering words? Is comprehension more than conscious cognition? Absolutely. Cognitive psychologist George Miller embodied this truth by telling of two passengers leaning against the ship's rail, staring at the sea. "`There sure is a lot of water in the ocean,' said one. `Yes,' answered his friend, `and we've only seen the top of it."'