Rectangular Statistics
Line BreakAuthor: tester (10 Articles)
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We have all use statistics in one way or anther, and have built our technologies and our assumptions on the Gauss bell distribution. Specifically, the widely used probability approach shows lower expectancies for extreme outcomes.
In recent decades, we have faced numerous downfalls in the financial market. Despite these fluctuations, the bell distribution only applies to occurrence once every fifty years. Therefore, the reality gives a much harsher picture that emerges every six or seven years. And, that fact brings me to a question; has the bell turned into a straight line/a rectangular statistics in today’s financial market? As described in “Black Swan“, a book by Nassim Nicholas Taleb, these negative or rare occurrences do surface much more frequently than we believe they should.
With the current TASE at around 1130 (7% less than its high peak in July 2008), we have almost made it back to the top. Based on both life experience and academic backgrounds, we have learned that all things in life occur in cycles, a type of cyclical reference occurrence. With regard to the TASE stock indexes, we should primarily assume that we are transitioning through the recession, and therefore can expect a period of financial increase. We have almost completed the “V” form in the index movement; first we experienced the high peak, which was followed by a deep plunge, and now we are almost back on top with the current TA25 1160 index.
So, what do we face now?
In all honestly, nobody actually knows. I have heard many theses, some of which claim that it is not actually “V”, but a “W”, or that we are facing a type of overturn “L” form in which we have almost reached the “Plateau” stage of our growth potential.
What is our most beneficial strategy, and are there the schemes to be used?
Based on rectangular distribution, the potential for a positive incidence is the same as the potential for negative. Thus, in accordance with history, the bell distribution from which we draw our assumptions no longer applies to the occurrence of downfalls. Contradicting the bell distribution, past collapses appeared with a much higher frequency than they were supposed to.
Since financial downfalls occur so frequently, the market no longer follows Gauss’ theory. This brings me back to the very conservative point of view on the market. Are we mispricing the potential downfalls? Based on their occurrence, we certainly are! Rectangular distribution gives us a fifty-fifty percent chance on case occurrences, either they will happen or they will not. So, should we start using rectangular distribution in our expectancy theories?
Line BreakAuthor: tester (10 Articles)
