Re:Trading Is Hazardous to Your Wealth [pdf] (2000)
by jaredtn on Thursday May 14, 2020 @04:34PM
(#23185043)
If I roll a 100-sided dice that pays me $99 if I roll a 1 and -$1 if I roll 2-100, then my expected value is $0, but my chance of profitability is 1%.
Re:Trading Is Hazardous to Your Wealth [pdf] (2000)
by bugzz on Thursday May 14, 2020 @04:40PM
(#23185103)
He's saying that traders don't just make 1 bet in their lifetimes though.
Re:Trading Is Hazardous to Your Wealth [pdf] (2000)
by jaredtn on Thursday May 14, 2020 @04:43PM
(#23185158)
True, but you have to account for the chance of ruin. Once you go broke, you have to stop betting. Many traders will continue betting larger and larger amounts of money when they win, but stop betting if they lose big. Making risky bets is quite likely to make you go broke, especially if you scale the size of your bets with the size of your bankroll. The [Kelly Criterion](https://en.wikipedia.org/wiki/Kelly_criterion) is the best way to approach it.
For point 2, if there is an expected return of 0, then on average this should push the portfolio toward 50% chance of profitability.
It is the psychological factors combined with a non-random market that ensure most traders lock in losses (usually after riding them too long or not long enough).