Tuesday, August 25, 2009

Detecting Random Events

I have been teaching accounting and finance for many years. One issue that continues to amaze me is that students do not properly understand what randomness is and are unable to distinguish between a random set of events and a non-random set of events. Below are two sets of results from tossing a coin (H = heads, T = tails), one set is random, the other set is non-random.

Set 1 Set 2
H H
H T
T T
H H
H T
H H
T T
H T
T H
T T
H H
H T
T T
H T
H H
T H
T T
H H
T T
H H
T T
T H
T T
T H
H H
T H
T T
T H
T T
H T
H H
T H
T T
T H
H T
H H
H T
T H
T T
T H




Send me an email (see below) with your selection of which set is the random set and, if you can, tell me why it is random and the other set is non-random. No prizes, just a warm inner feeling. I will answer your emails and tell you if you are correct.



My email address is: andrew [dot] read [dot] canberra [at] gmail [dot] com (written this way to reduce the risk of spam).


The reason this inability to detect randomness is a concern is that naive (and perhaps professionals as well) investors can be conned by charlatans selling bogus charting and other technical analysis systems.

39 comments:

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    ReplyDelete
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    ReplyDelete