Jun

28

An interesting reading for people who deal with probability. The last sentence of this article, "Blackwell's Bet", sums it up nicely: "It's unexpected and ironic that an unrelated random variable can be used to predict that which appears to be completely unpredictable."

Rocky Humbert writes:

I would posit something that is market relevant. The envelopes contain positive integer amounts of money.

For simplicity, let's say you open envelope X and find that it contains $5. And we are trying to guess envelope Y.

There are are only 5 possible amounts that are smaller than X: $5, 4, 3, 2, 1.

But there are infinite number of possible amounts in envelope Y that are greater than X: 5, 6, 7, 8…. to infinity.

Since we know nothing about the distribution, is it not reasonable to surmise that Y probably is in that much bigger universe (between 5 and infinity)?

This is intuitive. Not mathematical. The same thing is true for people who trade on the long side. Prices can rise an infinite amount. But they can only decline to zero. Hence, there is a natural edge to trading from the long side ceteris paribus.


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