5 ms·

I recommend watching this lecture, as the effect here isn't magic or fake: it is just a tradeoff of how you manage your portfolio to convert volatility into ret

by saurik 4y ago

I recommend watching this lecture, as the effect here isn't magic or fake: it is just a tradeoff of how you manage your portfolio to convert volatility into return and there is a ton of well-studied math relating to how it works. https://youtu.be/8TJQhQ2GZ0Y https://youtu.be/8TJQhQ2GZ0Y And like, yes: there is a moment in the lecture where he explicitly sets up a scenario where the expectation value of your bets sums to zero and yet the rebalancing makes money. It isn't a free lunch, of course: if the two assets both go down and stay down then you lose money, and you don't gain as much money as you'd want on the way up; but if they are both sputtering around you definitely make money. If you were to somehow be able to rebalance infinitely fast it also doesn't make money; and yet, it only makes money in relationship to the volume you are able to rebalance, so there is another tradeoff. At the end of the day you can thereby model it as making money by providing the service of "providing liquidity" to the market, and what you are effectively doing is taking a spread on that as a market maker.

s1artibartfast 4y ago
Is it just a fancy Martingale then?
- Dylan16807 4y ago
  A Martingale that you can do with finite money sounds pretty nice on the surface.
  - s1artibartfast 4y ago
    You can Martingale with finite money too.
    - Dylan16807 4y ago
      How? Google isn't helping.
      - s1artibartfast 4y ago
        The martingale strategy increases just shifts the risk around. Your typical (not average) bet becomes profitable, but a string of bad luck becomes catastrophic. You double your bet each time you loose, so you have a better chance of making back to your losses, however, you increase your chance of loosing everything to an unlikely event. https://en.wikipedia.org/wiki/Martingale_(betting_system) https://en.wikipedia.org/wiki/Martingale_(betting_system) You can do it with any amount of money, but it still isn't long term profitable unless you have an infinite bankroll.
        Dylan16807 4y ago
        I thought the wording was clear, but I meant doing it with no chance of getting stuck in an error state. Finite money can't properly implement a martingale. It can implement this strategy.
        s1artibartfast 4y ago
        Both are simply strategies with downsides. This strategy is just as broken. Properly applied to betting it goes broke in the long run too. it is identical to proportional betting, a strategy that makes no money on average with an infinite bankroll, and will eventually bankrupt you with a finite one. The description is also flawed in the blog. If anyone offers you a 50/50 bet to win $50 or lose $33,take it. Given that it's posted by financial advisors , The blog is probably intentionally misleading
        Dylan16807 4y ago
        > Both are simply strategies with downsides. This strategy is just as broken. A strategy like "always bet 10% of your bankroll on a coin flip" doesn't break. Whether it makes or loses money in the long run depends on the specific returns, but you can keep doing it indefinitely. You can't keep doing a martingale indefinitely. Bad luck doesn't just lose you money, it makes the strategy itself explode. Once that happens you can't recover even if you have good luck or a house edge.
- saurik 4y ago
  I do not see the connection, unless you are just talking at some useless-ly high level of "a trading strategy that isn't guaranteed to win" (though the way in which it fails isn't at all the same: it isn't that you go insolvent but that you made the wrong bet about the correlation of the assets), but that's me being extremely uncharitable and so maybe you are seeing something I am not. The mechanism is essentially unrelated, the goal is somewhat different, who does it is certainly different (at this is the core of market making and portfolio diversification, so smart people do this all the time)... I just don't see why you are saying that unless you are just trying to trivialize the result (but again: this is me being extremely uncharitable, so please push back if you are onto something).
  - s1artibartfast 4y ago
    I am trying to trivialize the result, although much of it is targeted at the broken and wrong example of the blog. It talks about rebalancing between two assets. For a gambler this could simply be the bet and the bankroll. (this is the example used in the blog). (ignoring the fact that the blog is playing a +EV game) what was described is "proportional betting". The short term outcome is a normal distribution with a mean of zero. Like the martingale, If you run it to infinity, you will always go broke. for proportional betting, the failure mode is a string of bad bets taking the bankroll below minimum bet size (the long tail on the normal distribution). When we talk about real world trading, the whole idea of "shannon's demon" is trivial. In the zero growth case, it assumes the mean value is known and constant so it just boils down to sell high, buy low.
    - cyanydeez 4y ago
      In the absence of any "new information" the market is believed to be a random walk. And before the information age, the market likely did act like this. But now adays, the dark pools, random subreddit s, etc, almost guarantee that a ticket will fluctuate a price incoherently. So to find the mythic mean is probably impossible. But the demon could be generate via a novel method of analysis, which definitely wouldn't be presented here, as knowing the method would invalidate mythic mean.
  - 4y ago

by saurik 4y ago

s1artibartfast 4y ago

Is it just a fancy Martingale then?

Dylan16807 4y ago
A Martingale that you can do with finite money sounds pretty nice on the surface.
- s1artibartfast 4y ago
  You can Martingale with finite money too.
  - Dylan16807 4y ago
    How? Google isn't helping.
    - s1artibartfast 4y ago
      The martingale strategy increases just shifts the risk around. Your typical (not average) bet becomes profitable, but a string of bad luck becomes catastrophic. You double your bet each time you loose, so you have a better chance of making back to your losses, however, you increase your chance of loosing everything to an unlikely event. https://en.wikipedia.org/wiki/Martingale_(betting_system) https://en.wikipedia.org/wiki/Martingale_(betting_system) You can do it with any amount of money, but it still isn't long term profitable unless you have an infinite bankroll.
      - Dylan16807 4y ago
        I thought the wording was clear, but I meant doing it with no chance of getting stuck in an error state. Finite money can't properly implement a martingale. It can implement this strategy.
        s1artibartfast 4y ago
        Both are simply strategies with downsides. This strategy is just as broken. Properly applied to betting it goes broke in the long run too. it is identical to proportional betting, a strategy that makes no money on average with an infinite bankroll, and will eventually bankrupt you with a finite one. The description is also flawed in the blog. If anyone offers you a 50/50 bet to win $50 or lose $33,take it. Given that it's posted by financial advisors , The blog is probably intentionally misleading
        Dylan16807 4y ago
        > Both are simply strategies with downsides. This strategy is just as broken. A strategy like "always bet 10% of your bankroll on a coin flip" doesn't break. Whether it makes or loses money in the long run depends on the specific returns, but you can keep doing it indefinitely. You can't keep doing a martingale indefinitely. Bad luck doesn't just lose you money, it makes the strategy itself explode. Once that happens you can't recover even if you have good luck or a house edge.
saurik 4y ago
I do not see the connection, unless you are just talking at some useless-ly high level of "a trading strategy that isn't guaranteed to win" (though the way in which it fails isn't at all the same: it isn't that you go insolvent but that you made the wrong bet about the correlation of the assets), but that's me being extremely uncharitable and so maybe you are seeing something I am not. The mechanism is essentially unrelated, the goal is somewhat different, who does it is certainly different (at this is the core of market making and portfolio diversification, so smart people do this all the time)... I just don't see why you are saying that unless you are just trying to trivialize the result (but again: this is me being extremely uncharitable, so please push back if you are onto something).
- s1artibartfast 4y ago
  I am trying to trivialize the result, although much of it is targeted at the broken and wrong example of the blog. It talks about rebalancing between two assets. For a gambler this could simply be the bet and the bankroll. (this is the example used in the blog). (ignoring the fact that the blog is playing a +EV game) what was described is "proportional betting". The short term outcome is a normal distribution with a mean of zero. Like the martingale, If you run it to infinity, you will always go broke. for proportional betting, the failure mode is a string of bad bets taking the bankroll below minimum bet size (the long tail on the normal distribution). When we talk about real world trading, the whole idea of "shannon's demon" is trivial. In the zero growth case, it assumes the mean value is known and constant so it just boils down to sell high, buy low.
  - cyanydeez 4y ago
    In the absence of any "new information" the market is believed to be a random walk. And before the information age, the market likely did act like this. But now adays, the dark pools, random subreddit s, etc, almost guarantee that a ticket will fluctuate a price incoherently. So to find the mythic mean is probably impossible. But the demon could be generate via a novel method of analysis, which definitely wouldn't be presented here, as knowing the method would invalidate mythic mean.
- 4y ago