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Wouldn’t you love to take all your losses and combine them to magically create a profit?
Parrondo’s Paradox says this is theoretically possible. According to Parrondo’s paradox, two games guaranteed to make a player lose all his money will generate a winning streak if played alternately.
In other words, alternate between listening to Jim Cramer and listening to Richard Bernstein
Although it certainly wasn’t invented because the physics professor, Juan Manuel Rodríguez Parrondo, was seeking stock market profits, it has gone on to inspire wide ranging ramifications including the mechanics of evolution and managing investment portfolios. Before you get excited though, bear in mind that the two “games” have to be related to one another before the paradox has any effect. Here’s a visual representation of Parrondo’s Paradox.
From the New York Times article:
Economists are studying Parrondo’s paradox to help find the best strategies for managing investments. Dr. Sergei Maslov, a physicist at Brookhaven National Laboratory in Upton, N.Y., recently showed that if an investor simultaneously shared capital between two losing stock portfolios, capital would increase rather than decrease.
“It’s mind-boggling,” Dr. Maslov said.
“You can turn two minuses into a plus.” But so far, he said, it is too early to apply his model to the real stock market because of its complexity.
I do remember reading somewhere that two trades which by themselves can be unprofitable, can be combined to create a profit. I think it was in the Wizards series by Schwager where a trader was talking about options. I never quite understood how this was possible. Maybe he meant Parrondo’s paradox. Does anyone recall that excerpt? ring any bells?
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