Aug

27

EnvelopeTwo Australian physicists claim to have made progress on the Two Envelope Paradox, according to an article on PhysOrg.Com.  In reading the article I came across… turning  losing games into winning games… brownian ratchets… volatility pumping…  winning an exponentially increasing amount of money.  It all sounds too good to be true.

Alex Castaldo replies:

The problem with volatility pumping is that in the real world the gains would usually be wiped out by the transactions costs of constantly selling the more expensive and buying the cheaper of the two stocks. As long as the two stocks keep switching places you would make an infinite amount of money … for your broker.

Thomas M. Cover is a highly respected name in Information Theory , but I must say when I read his Finance papers/books I find them a bit strange, either because I don't understand them or because they seem unrealistic. But we have other contributors here who are more familiar with his work.

As for Parrondo's Paradox it is another strange model of a situation that as far as I know never occurs in Finance, where sometimes in order to be more successful you need less capital; so you need to invest badly at times in order to do very well at other times. No practical use that I can see.  I am pretty sure that in the real world you need to invest well at all times and that playing to purposely lose is never optimal.


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