POLSCI 391 Lecture Notes - Lecture 10: Time Series, Efficient-Market Hypothesis, Fair Coin
Document Summary
Performance = a*luck + (1-a) * skill. Paradox of skill: the very best differ little in skill, winners largely determined by luck, if skill distribution is super tight, determined by luck. Each period flip a fair coin: if it is heads +1, if it is tails -1. Result 1: after n (even #) of flips, you should expect to be at 0. Result 2: for any number k, a random walk will: pass k and +k an infinite number of times, have a streak of k heads (and k tails) an infinite number of times. People don"t put in long enough streaks. Coin flip model: odds of beating s&p in one year = , odds of beating s&p two in a row = ( )2, odds of beating s&p 15 in a row = ( )15, one in 32,768. Regression to the mean: a group that did well for a short time, should be average in the long run.
