The Professional Trader’s Paradox

3 Pages Posted: 12 Dec 2018

Date Written: November 20, 2018

Abstract

In this article, I will present a paradox whose purpose is to draw your attention to an important topic in finance, concerning the non-independence of the financial returns (non-ergodic hypothesis). In this paradox, we have two people sitting at a table separated by a black sheet so that they cannot see each other and are playing the following game: the person we call A flip a coin and the person we'll call B tries to guess the outcome of the coin flip. At the end of the game, both people are asked to estimate the compound probability of the result obtained. The two people give two different answers, one estimates the events as independent and the other one considers the events as dependent therefore they calculate the conditional probability differently. This paradox show how the erroneous estimation of conditional probability implies a strong distortion of the forecasting skill that can lead us to bear excessive risks.

Keywords: Trading Models, investment strategies, non-ergodic, performance measurement, risk management

Suggested Citation

Berdondini, Andrea, The Professional Trader’s Paradox (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3287968

Andrea Berdondini (Contact Author)

Independent ( email )

No Address Available

Register to save articles to
your library

Register

Paper statistics

Downloads
71
rank
322,075
Abstract Views
226
PlumX Metrics