Black Arb

Probability 2

2009-07-18T08:33:00.000-07:00

I want us to avoid rambling on topics without establishing meaningful results that we can use. Until now we can agree general probability theory is garbage in understanding events and that if you think enough about a problem, you’re very likely to find the solution. So I encourage you to share your view, disapprove me or whatever so we can have results – this is not a social blog for those who are bored. I want it to become a philo-scientific blog to develop our understanding on chosen topics.

A long ago when going school and gambling I used to spend some time trying to understand randomness. One thing I used to do is flip a coin and think about the probability of either side over a series of trials. But I realized I was paying all my attention to the end result or outcome (head or tails) - not much on the process. Clearly the reason why I couldn't understand the results was because every flip was different. So if I flipped the coin so slowly so that I could count the number of flips I could know the outcome. - So throwing the coin wasn't actually a random at all - it's jus that I don’t have the ability with my vision to count the fast flips in the air, simple! So if I had some technology to make the counts I would know the outcome with 100% accuracy.

So what's the point of all this? - The point is that nothing is hardly random. We say it's random simply because we don't understand the causal dynamics of the process. Everything is a system. I believe if we go back thousands of years, forecasting the weather would seem ridiculous. Today we’ve establish advance ecosystems and other similar models. In the past or even today in parts of some developing nations, catching some disease or getting infected is considered an omen or punishment of some sinful act from gods. But with today’s medical knowledge we understand the causes of many diseases and conditions. Humans have a natural tendency to get superficial on anything they don’t understand.

So what happened to randomness? If we could identify the physics of throwing a dice and the roulette wheel spin is it really random? I believe once it overcomes your natural default ability to conceive or digest the process it is called ‘random’. With this view – taking part in any game or activity which you don’t understand – is a big mistake. For some it gives great thrill – as guessing right the outcome of a complex system gives a special feeling – in possession of super human gift or simply luck. Those who make a naked guess are luckier than those thoughtfully busy formulating an ‘intelligent’ guess on a process beyond their realm of understanding.

So - then what is true randomness?
Does not the fact that “black swans” do occur (albeit rarely) make it explainable? We don’t need Taleb telling us rare events happen. But is it not a result of a complex system?
How should we think of probability distributions?

2009-06-04T09:47:00.001-07:00

One of the most interesting courses I took while at LSE was Systems Dynamic Modelling taught by Dr David Lane. I believe there is also a big SD group at MIT.

SD is basically the study of complex systems and how they behave over time. Take for example the wheather or the stock market. You simply model a system based on how you think it works with certain inputs, processes, loops and outputs with various variables. You can then study how it shapes if certain factors change.

A leading software for SDM is Stella. I highly recommend SDM in modelling and understanding complex systems. It also helps you your own thought processes. I remember in one class Dr Lane gave us a practical experiment. We all stood around the class in a circle and had to pass a a number of items randomly to each other but keep the order the flow the same. For example, imagine every node below is a person and you're meant to pass items as they come in in the same order you passed around the previous item in the group - until the item goes out of the system.

We timed the process for passing 3 items around the group and it took around 2 mintues. note - everyone has to remember the order they are passing the items.

We were then asked to speed up the process. The ONLY constraint being that we had to keep the order flow the same.

So we tried passing the items faster in the group. we managed to beat our record by 10-15 seconds. Again we were asked to review our constraint and think how we can speed up the process. someone suggested to move closer to each other!

This improved our time by another 10 seconds. We again had to think how we could improve it even more. Suddenly someone suggested why don't we re-organise the circle in the order we pass the items through! Genius! Why didn't we think of that earlier!

This improved our time by over 60 seconds! We thought again - why don't we just get in a straight line?!

We now managed to pass all three items under 15 seconds!

The point of the above excercise was that we thought kept thinking about the problem and how to improve the process - and the discovery we made was a serious leap in our improvent. This is the case with every issue in life - the more we think about problems the better ideas we get - but as we keep thinking about the problem suddenly a revolutionary ideas pops in our thoughts from no where that changes everything.

The bottom line is, to achieve an evolutionary solution or change you must keep thinking and reviewing your thoughts, headches and stress are good. You must create tension and suddenly you will have a big bang of your own.

What is Probability?

2009-06-02T18:06:00.000-07:00

There is something seriously missing in probability theory. Say for example, what is the probability of rolling a dice and getting a face 5? General answer is 1/6. But what does this exactly mean? One way is to say we have 0.17% chance of getting face 5. But probability theory also suggests if we roll the dice 6 times we expect to have one observation of a face 5 - i.e. 1 in 6. But this is not guaranteed is it? so clearly 1/6 is completely misleading. In fact probability of NOT getting a face 5 rolloing the dice 6 times in a row is (5/6)^6 = 0.0001. Basically zero or assured that there will be a face 5. How confident are you with theory?

I recall Paul Wilmott gave a good example. Imagine a magician with a pack of cards asks you to name a card at random. Lets say you picked Ace of Spade. He then shuffles the pack and then picks out a card at random. What's the probability that it will be Ace of Spde? One can say 1/52, agree? but oh wait he's a magician so it must be 100%? or actually what if the magician is capable of making an error in his work?

I once thought of some events capable of taking place at certain points in time and others not. I emailed Nassim Taleb to get his thought on how time can influence outcomes and his reply was basically that time acts like variance. What!?

I once found an automated Poker game on the net at http://games.betfair.com/. The game is continuous, you don't actually get a hand, you're presented with 4 hands and you can back or lay (go against) any of them with a bet. Impressive I thought. After watching few games go by I quickly thought of martingaling a hand (double up on losses) as an experiment, since the game *apparently* is computer generated. Suddenly I lost when a *rare* event occurred - when one hand that I laid against won 7/8 times in a row. But I kept watching. For weeks. I noticed this rare event does happen in this game but doesn't follow from another. I didn't pursue as it required too much attention and the pay-off if successful does not make it worthwhile. But very interesting if you want to put probability to test. They have similar games that follow the same behaviours. i.e. it follows man's idea of what probability is. It's artificial. And I truly believe there is someone sitting behind their server who can change an outcome of any game at an instance if a serious wager is made on any single hand. Betfair offers you to download historical results of all games and do any analysis in Excel. You can also access the game via an API if you can build a bot and the minimum you can wage is even lower then.

A small blog to share ideas..

2009-06-02T17:06:00.000-07:00

And finally I managed to put a blog together. The point of this blog is simple - to find people like myself to share ideas about life. It's not necessary a good or bad thing but I spend a lot of time thinking about life and search for meaning in everything that happens. From religion, science, experience and everything in between, I want this page to turn into a place where we can establish ideas and results that improve our understanding of life. This isn't a psychology or help page, it's more about improving our intelligence about who we are, what we do and everything that happens to us. From love, relationships to nature and the stock market.

A short time ago I was a student with little concern about the real world. Later I was working for a major bank. Working in the market gives you a good idea of the complexity of human nature and society. You pay good attention to all forms of news and events that shape the economy and everything else. I remember once I was thinking about the future of my work and how things can shape out. The last thing I imagined was the whole bank to be on the brink of bankruptcy and everyone at risk of losing their jobs.

Life is in a continuous state of change. It's changing all the time, and it does not revert to any past state. Stages in life may be similar but never exactly the same. We change also but life influences and shapes us more strongly than how we can shape her. There is alot we all want to do and learn in life. Alot to achieve and be happy. Be fullfilled. Whatever that is to make it worthwhile for you. But can all this happen at the same time? Are we not competing for most things? A partner, a job, a house etc? I think most of us are seriously on our own. Literally. No matter how many friends, families etc. most people are solo in life. It's like a computer game and you've selected single player. This makes everyone more strategic in what they do, how honest they are with even small issues. Whichever way this blog is for establishing results and ideas that can help us understand ourselves better, and improve our understanding of everything else. From understanding human nature, war, gods, greed to randomness, gambling and strategic decision making.