I find it very annoying that a body of knowledge like investing, which is entirely skill-based, is relegated to gambling. Personally, I do not believe in the law of the average when it comes to investing. The law of averages is the general belief that a particular outcome or event will occur over certain periods of time with a frequency similar to its probability. [1] [2] Depending on the context or application, it may be considered a valid observation of common sense or a misunderstanding of probability. This idea can lead to the player`s mistake when he is convinced that a certain result must happen soon simply because it has not happened recently (for example, believing that because three consecutive coin tosses have yielded heads, the next coin toss must be practically guaranteed tail). Player error is a particular misapplication of the average law, where the player believes that a certain outcome is more likely because it has not occurred recently, or (conversely) because a particular outcome has occurred recently, it will be less likely in the immediate future. [5] A common example of how the law of mean can be misleading is to toss a fair coin (a piece that has an equal probability of turning the head or tail with each throw). If someone tosses a fair coin and gets several heads in a row, that person might think that the next toss will bring tails rather than heads to “balance things out.” But the real probabilities of both outcomes are always the same for the next draw and each draw that may follow. Past results have no effect: each litter is an independent event. The misunderstanding in the law comes from the convergence component. That is, if we could watch Two-Face toss a coin an infinite number of times, the expected value of the decapitation would be 50%. The law does not guarantee anything about a finite number of events. If we are talking about an infinite number of events, then the individual event of the single draw of a coin does not matter.
Adding an event to a weighted sum of an infinite number of events does not affect the final value. I spent last weekend devouring Burkus` recent book on networking and the science of social connections, and was intrigued by the compelling evidence highlighting the potential that lies in weak and peripheral ties within community clusters, highlighting how connected we all are. In many cases, we are more closely linked than the oft-cited phenomenon of six degrees of separation, especially in the modern age of social media. In fact, people who have a Facebook account are usually within 4.2 degrees of each other. Many artists take inspiration from other creators, but if they are not careful, they run the risk of becoming imitators instead of creating fresh and original works from a unique point of view. It`s helpful to explore and get a sense of what`s out there in the world, just as it`s beneficial to choose who and what affects you, but sometimes you have to unplug and block distractions completely to really clarify who you are, what inspires you, and what opinions are really yours. Nature is great for this, as is meditation. Slow down. Become still and still. Embrace moments of loneliness.
The most common example of violating this rule is sports. Just because Kobe is a 78% free throw shooter and made 6 of 6 free throws in this game doesn`t mean he`s more likely to miss his next free throw. The law of large numbers is often confused with the law of average, and many texts use the two terms interchangeably. However, the strictly defined law of the average is not a law at all, but a logical error, sometimes called the player`s error. The logic provided here (mainly by cricket commentators) is that the law of averages will come into play. A logical consequence of the average law is the belief that if an outlier event (such as 500 race innings) has occurred, it is less likely to happen again in the near future. This serves to maintain the delicate equilibrium fermented by the concept of the average law. A few years ago, two researchers combed through the vast dataset of the Framingham Heart Study, which tracked an interconnected social network of more than 12,000 people over a 32-year period, from 1971 to 2003, and they discovered incredibly interesting results that led them to conclude that the likelihood of developing obesity may be influenced by associations to the second and third degree. A famous example of the law of averages in the game is the player`s mistake (see below), who believes that a losing streak is “equalized” at the end. That will not be the case. For example, let`s say you bet on red on a roulette table but lose ten times in a row, with each ball landing on black. They think that the law of the average will lead to a red stripe.
That will not be the case. The probability of getting a red in each rotation is 1/2, no matter how many times it is rotated. A series of defeats is just that: a series of defeats. The next round is just as likely to be black as it is red. The law of the average is a belief that everything tends towards the average. And there is no room for superlatives. This is often used in a cricket match or in sales seminars. In this article, we see if the law of the average really works in the investing profession In his speech and article (titled: Graham and Doddsville`s Super Investors), Buffett challenged the idea that stock markets are efficient.
