"mathematically impossible"
- Thread starter Gordon Gekko
- Start date
<b>RE: alain and the Zero-Sum Game:</b> I like alain's analysis of the zero-sum nature of the markets - either superior timing or superior selection is the key to beating the index. Of course, a topic of another thread might be whether the average return on equities couldn't be negative for a decade or more (perhaps posted on the "slow crash" thread here at ET). I did want to explore some of the nuances of the zero-sum effect in the markets -- its not as simple as one-winner = one-loser, even if the sums balance to 0 (or to some base level of average performance, such as 8%/yr)
<b>Zero-Sum, N-Party Game:</b> With more than two players the distribution of winnings and losings can be very interesting. Its not necessarily one winner neatly balanced against one loser. For example, one person might get 4% over the index average, while 4 other people each get 1% under the index average. Or, one large trader gets 4% over the index, while a tiny trader (1/25 the size of the large trader) loses nearly 100%.
<b>Zero-Sum, Open Membership of Traders & Investors:</b> The markets are also a zero-sum game with open-membership -- a constant flux of players entering and leaving the "game." If "losers" leave, they leave their capital in the market, and then the averages of the winners would climb. But, if "winners" leave, the total market capitalization drops and share prices decline. Indeed, winning traders who spend some of their profits, really are taking money out of the market. This effect is of more than academic interest. Some argue that part of the basis for the recent great rise in the U.S. markets has been the influx of capital from baby-boomers - the inexorable demographics of a large number of people reaching peak earning/saving years. In retirement, these people will drain the market (who is ready for the bear market of 2020?).
<b>Zero-Sum, Open Membership of Companies:</b> The companies that make up the markets are also players -- being buyers or sellers of shares and creators or destroyers of shareholder value. Webvan's $1 billion came from the markets and VCs and went into the wallets of employees, suppliers, contractors, consultants, etc. Money in WCOM went into those much-hated dinner-time sales calls for switching long-distance. And companies are the ultimate inside-traders, picking the best time to IPO, do price-splits, rebuy shares, do management LBOs, etc.
<b>Non-Zero, Zero-Sum Games: Participant Asymmetry:</b> Finally, it is also possible for one participant to average 12% while another participant averages 4% and have both participants be "winners" in their own minds. The 12% player may be taking extremely risky plays, while the 4% player is sticking to conservative trades/investments. Both sides are happy with their choices. The risk taken by the 12% player may not even involve any chance of bankruptcy -- just the volatility of the high-gain trading style may scare-off the investor who seeks a constant 4%/yr.
<b>Hike in the Swiss Alps:</b> OK, now I know that I'm on the losing side and alain is on the winning side of the game!
I was sitting inside pontificating about math while alain was enjoying the mountains. And I've got no excuse -- I'm 2 blocks from a trailhead in the foothills of the Rockies, so I should be out there too!
Have a great weekend everyone,
Traden4Alpha
<b>Zero-Sum, N-Party Game:</b> With more than two players the distribution of winnings and losings can be very interesting. Its not necessarily one winner neatly balanced against one loser. For example, one person might get 4% over the index average, while 4 other people each get 1% under the index average. Or, one large trader gets 4% over the index, while a tiny trader (1/25 the size of the large trader) loses nearly 100%.
<b>Zero-Sum, Open Membership of Traders & Investors:</b> The markets are also a zero-sum game with open-membership -- a constant flux of players entering and leaving the "game." If "losers" leave, they leave their capital in the market, and then the averages of the winners would climb. But, if "winners" leave, the total market capitalization drops and share prices decline. Indeed, winning traders who spend some of their profits, really are taking money out of the market. This effect is of more than academic interest. Some argue that part of the basis for the recent great rise in the U.S. markets has been the influx of capital from baby-boomers - the inexorable demographics of a large number of people reaching peak earning/saving years. In retirement, these people will drain the market (who is ready for the bear market of 2020?).
<b>Zero-Sum, Open Membership of Companies:</b> The companies that make up the markets are also players -- being buyers or sellers of shares and creators or destroyers of shareholder value. Webvan's $1 billion came from the markets and VCs and went into the wallets of employees, suppliers, contractors, consultants, etc. Money in WCOM went into those much-hated dinner-time sales calls for switching long-distance. And companies are the ultimate inside-traders, picking the best time to IPO, do price-splits, rebuy shares, do management LBOs, etc.
<b>Non-Zero, Zero-Sum Games: Participant Asymmetry:</b> Finally, it is also possible for one participant to average 12% while another participant averages 4% and have both participants be "winners" in their own minds. The 12% player may be taking extremely risky plays, while the 4% player is sticking to conservative trades/investments. Both sides are happy with their choices. The risk taken by the 12% player may not even involve any chance of bankruptcy -- just the volatility of the high-gain trading style may scare-off the investor who seeks a constant 4%/yr.
<b>Hike in the Swiss Alps:</b> OK, now I know that I'm on the losing side and alain is on the winning side of the game!
I was sitting inside pontificating about math while alain was enjoying the mountains. And I've got no excuse -- I'm 2 blocks from a trailhead in the foothills of the Rockies, so I should be out there too!Have a great weekend everyone,
Traden4Alpha
the first boomers will start retiring about 2010, and retirements will probably peak around 2020. during this time, however, another big piece of the demographic pie will just be entering a very strong spending period of their lives - the children of the boomers. there are also huge numbers of immigrants entering the country between now and then too, adding extra spending power.
disclaimer: i may not know what i'm talking about. lol
anyway, i heard that the age which you can collect social security...or some other retirement money is just outside of the average life expectancy. some say it is done this way on purpose. as i said, i don't really know what i'm talking about..i just remember hearing something like this before....maybe someone else can expand on this.
anyway, i heard that the age which you can collect social security...or some other retirement money is just outside of the average life expectancy. some say it is done this way on purpose. as i said, i don't really know what i'm talking about..i just remember hearing something like this before....maybe someone else can expand on this.
<b>daniel_m,</b> I'm sure you are right the boomer echo and immigration -- its not like I've put all my capital into 2020 puts. I'm just saying there will be a large shift in capital from equities into fixed income (a drop in the % of household wealth in equities). And then there is whatever the govt does to try to cover all social security payments to all the retirees -- that won't be pretty (I smell deficits & taxes).
OK, this all just hot air. For all I know, we'll all be trading e-nano options on subordinated debentures, or swing-trading SSF on some hot new adult diaper start-up (the s-POOs), or trading in Microsoft-Dollars, or scalping carbon dioxide emissions futures or who cares. Regardless of what the tradable is, I'm sure that somebody will be making consistent profits.
<b>Higher geometry stuff:</b> I'm not above playing with the occasional Gaussian hyper-ellipsoid -- probability distributions get really strange in higher dimensions (tails are inevitable). Geometry can also help think about the properties of correlation matrices, price trajectory models, n-stock portfolios, etc. It really depends on how you like to think about the markets -- sometimes geometry helps, sometime combinatorics is good, or graph theory. But one doesn't need to get too sophisticated to have some bit'o mathematical machinery help provide a little insight or help organize one's thoughts about so part of the markets. My rule: avoid any book with the word "lemma" in it (but that's just me).
Cheers,
Traden4Alpha
I'm just saying there will be a large shift in capital from equities into fixed income (a drop in the % of household wealth in equities). And then there is whatever the govt does to try to cover all social security payments to all the retirees -- that won't be pretty (I smell deficits & taxes).OK, this all just hot air. For all I know, we'll all be trading e-nano options on subordinated debentures, or swing-trading SSF on some hot new adult diaper start-up (the s-POOs), or trading in Microsoft-Dollars, or scalping carbon dioxide emissions futures or who cares. Regardless of what the tradable is, I'm sure that somebody will be making consistent profits.
<b>Higher geometry stuff:</b> I'm not above playing with the occasional Gaussian hyper-ellipsoid -- probability distributions get really strange in higher dimensions (tails are inevitable). Geometry can also help think about the properties of correlation matrices, price trajectory models, n-stock portfolios, etc. It really depends on how you like to think about the markets -- sometimes geometry helps, sometime combinatorics is good, or graph theory. But one doesn't need to get too sophisticated to have some bit'o mathematical machinery help provide a little insight or help organize one's thoughts about so part of the markets. My rule: avoid any book with the word "lemma" in it (but that's just me).
Cheers,
Traden4Alpha
Originally posted by Traden4Alpha
<b>daniel_m,</b> I'm sure you are right the boomer echo and immigration -- its not like I've put all my capital into 2020 puts.
OK, this all just hot air. For all I know, we'll all be trading e-nano options on subordinated debentures, or swing-trading SSF on some hot new adult diaper start-up (the s-POOs), or trading in Microsoft-Dollars, or scalping carbon dioxide emissions futures or who cares. Regardless of what the tradable is, I'm sure that somebody will be making consistent profits.
<b>Higher geometry stuff:</b> I'm not above playing with the occasional Gaussian hyper-ellipsoid -- probability distributions get really strange in higher dimensions (tails are inevitable). Geometry can also help think about the properties of correlation matrices, price trajectory models, n-stock portfolios, etc. It really depends on how you like to think about the markets -- sometimes geometry helps, sometime combinatorics is good, or graph theory. But one doesn't need to get too sophisticated to have some bit'o mathematical machinery help provide a little insight or help organize one's thoughts about so part of the markets. My rule: avoid any book with the word "lemma" in it (but that's just me).
Cheers,
Traden4Alpha
Higher math? You really a mathemetician? I have a friend who teaches high school math... told him the 2 most valuable classes I ever took in school were typing and 7th grade algebra. Still use it. How's this... y=mx+b (Hint... "less is more")
i agree with typing class....
a s d f space j k l ; space
do you guys know the letters are in a bad order on purpose? the QWERTY system was designed when typewriters would get jammed if you typed too fast. so they put the letters all over the place. as people started to learn the QWERTY system, they never bothered to change to a better order..so we still have it today.
a s d f space j k l ; space
do you guys know the letters are in a bad order on purpose? the QWERTY system was designed when typewriters would get jammed if you typed too fast. so they put the letters all over the place. as people started to learn the QWERTY system, they never bothered to change to a better order..so we still have it today.