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gambler's fallacy
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Simulation and Trading
Traders forecast future prices using some combinations of fundamentals, indicators, patterns, and behavior from the past. They hope that recent history will forecast the future helping them to make some profit. The problem, however, is that nothing that has happened in the past is any guarantee for the favorable results in the future. Basically, profitability of each trade has elements of some randomness and uncertainty. Here is the problem that many people are not equipped with enough knowledge and tools to manage uncertainty, thus mastering the psychology of trading.
At first glance trading may seem quite trivial. You just look at price chart, then buy here and sell there. But it in practice it's much more complex than that. Trading is about what had happened in the past while trying to predict what will happen in the future. However, no one can precisely know the future in advance. Dealing with random outcomes from each trade, trading is a probability exercise, where a good trader biases the outcomes of each trade in his or her own favor. As, in order to succeed a trader need to have probability on his or her side. Traders use patterns from the past to forecast the future. Forecast doesn't mean certainty, but it's about that we know the likely future direction of the market where we are trading. However, we can be certain that in the past when the patterns, fundamentals or indicators have been as they are now, then the probability is in our favor.
At the same time one needs to be very careful with forecasts and gut feeling about the direction of the market, so that one doesn't get into the trap of gambler's fallacy when dealing with risk and uncertainty. Some traders hold beliefs that are likely to be wrong. They say that after a string of losing trades success on the next trade is more likely, so position size on the next trade should be increased. This may or may not be true in trading, but for most random events like tossing coins, it is definitely not true. What it implies is that the probability of winning each trade is somehow influenced by the result of the previous trade. This is not true for rolling dice, flipping coins or drawing marbles from an urn neither the coin, the marbles, nor the dice have any memory of the outcomes.
A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
Before playing the stock market game, I honestly had no idea about how the stock market work. I, however, have learned so much about the process of the stock market. It was an advantage to learn how to buy and sell stocks without losing any thing, that will indeed enable me to invest in the real stock market without any concern. I learned that there is no certainty about wining or losing; however, there are many factors that we should consider before buying or selling stocks. One of theses factors is follow the daily news about the firm that you are willing to buy its stocks. Following the history of the firm transactions is also a significant factor that must be considered. The level of stability
There are many different ways to save money and there are different things to save for. A savings plan for an immediate want is apparently different than a savings strategy for retirement. One may choose to select stocks, bonds, or mutual funds for a savings strategy, however, my personal choice is to invest in bonds first, then mutual funds.
Cheap and efficient trading is what securities traders wanted and that is what they got. Volumes transacted saw unprecedented increases, with the average daily number of trades going through the ceiling”(1.) This attests to the idea that with the advances made in technology today, Wall street will not be able to keep up. The “nerds” of society will be able front run the stock market and make more money in seconds than anyone could ever imagine.
The stock market is a vehicle to invest money. It is where consumers buy and sell fractions of companies, and is referred to as stocks. A proven method to achieve wealth while keeping up with inflation, comprised of publically held companies who offer goods and services that are used by the general public daily. Companies sell stocks to public investors in a free and open market environment on a daily basis, which is an effective strategy to build a sound financial future.
A probably is measured between zero and 100%. Kahneman and Tversky noted that for very small probabilities, people round the probability to zero. For high probabilities, people round up to one. If people decide not to round the probability to zero or one, they exaggerate the difference between zero and one. For most people, there are three probabilities; the event can’t happen, the event might happen or the event will happen. Prospect theory explains much of what happens in finance, but prospect theory doesn’t explain everything. Other biases, such as overconfidence and cognitive dissonance, cloud thinking. The tendency for overconfidence produces anomalies and opportunities for manipulation. Cognitive dissonance is a judgmental bias people tend to make as they can’t admit when they are wrong. People will cling to old beliefs and try to find evidence to support their beliefs because they have an ego involvement with the
There are many ways to run a country, whether its capitalism, socialism, or communism. My class has been running a pure capitalist simulation game. I believe pure capitalism is not the way, but pure socialism is the right way to go. I would have price control and food stamps.
The supply and demand simulation shows the complex of a real life in Atlantis, which is the only company that would rent out apartments. The simulation was to inspect micro and macro concepts, ordaining how shifts come about in supply and demand curve in its equilibrium balance affecting decision making and of the prices of the units.
when making in decisions in markets because they will try to predict how an different outcomes
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
In the excerpt from “Biosphere Politics” by Jeremy Rifkin. I found something very interesting. He states “The separation of human beings from nature and the parallel detachment of human consciousness from the human body has transformed western man into an alien on his own planet” (Rifkin). If people could take trips to other places with out leaving the sanctity of there own home it would be an amazing experience. I also was amazed with Rifkins idea of downloading the human consciousness into a machine. If this is possible the human kind has found the fountain of youth.
The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to explain human investors’ behaviors.
money so when there is a change in the market the strategy may not be
Gambling has been around in our societies for a very long time. Over the time as the stakes involved in gambling rose, so did sophistication in rules in how to gamble rose. Although rules that came into force to govern how to gamble were helpful in reducing the number of complaints for foul play, other rules in terms of how to gamble are more informal and can also be considered as strategies.
Lepori, G.M. 2009. Dark Omens in the sky: Do Superstitious Beliefs Affect Investment Decisions. Copenhagen: Copenhagen Business School. SSRN. http://papers.ssrn.com/ (assessed February 22, 2011).