4 ms·
I'm not trying to be negative... The article claims the expected gain from this strategy is 2% but it's actually 0%. Plug in the numbers for all permutations of
by fml_101 4y ago
I'm not trying to be negative... The article claims the expected gain from this strategy is 2% but it's actually 0%. Plug in the numbers for all permutations of possible results if you don't believe me.
Starting with a dollar and betting half we get:
1 flip
H .5 gain
T -.5 loss
2 flips
H H = .5 + .75 = 1.25
H T = -.25
T H = -.25
T T = -.75
3 flips
H H H 1.125
H H T -1.125
H T H .75/2
H T T -(.75/2)
T T H .25/2
T T T -(.25/2)
T H H .75/2
T H T -(.75/2)
You can see the expected outcome, or average, is always 0, not .02 times the initial investment as this article claims to prove.
I'm not saying rebalancing is a bad investment strategy as it reduces volatility in favor of smaller gains, but it can't generate returns on zero growth assets like fair coin flips. The writer either doesn't understand that or is misleading the audience.
This is how inexperienced investors get lured into losing their life savings. It's not a joke.
- Dylan16807 4y agoThose aren't the odds the article uses at all. In the article if you start with a dollar and bet 50 cents, a win gives you +25 cents and a loss gives you -16.7 cents. If you don't rebalance, the median outcome is that your 50 cents stays 50 cents forever. If you do rebalance, the median outcome is steady growth.
- fml_101 4y ago"The median outcome is steady growth" - Yeah, no that's wrong. There's no algorithm you can use to get steady growth from a fair coinflip. Math 101
- Dylan16807 4y ago> There's no algorithm you can use to get steady growth from a fair coinflip. Math 101 THE WIN ON A SINGLE FLIP IS BIGGER THAN THE LOSS The coin flip is a completely fair 50:50, but you're not playing double or nothing. You're playing "gain 50% or lose 33%".