From: John Conover <john@email.johncon.com>

Subject: Re: Electric Money

Date: 4 Oct 2001 15:29:48 -0000

BTW, the tsinvest's -d5 option is based on the Farmer/Packard concepts. In the television program, Farmer discusses how to exploit the fact that the mechanics of the game of roulette does not have infinite entropy. Although in the long run, the mechanics will be statistically consistent, (each number coming up 1 / 35'th of the time, for the numbers 1 - 33, 0, and 00,) there is a slight bias to local predictability in the short run. This can be considered a systemic inefficiency in the random number generator of roulette-the velocity of the ball when spun around the wheel by the croupier is not perfectly random, (i.e., the number of times the ball rotates around the rim of the wheel before striking the wheel is not perfectly random,) and once the ball hits the wheel, the chances that it will settle close to numbers where it hit is higher than for the rest of the numbers. What this means is that the time series of the winning numbers, over many spins of the roulette wheel, will have a slight bias to contain patterns. (Its an important concept that an infinite entropy stochastic system is probably a mathematical abstraction that is not perfectly obtainable in the real world-all such systems are chaotic NLDS to some degree.) For example, if red 7 came up as the winning number for the last spin, there is not exactly a 1 in 35 chance for any other number to come up the next spin-some numbers have slightly more of a chance, others less-a fact that is exploitable, (and just about cancels the house's advantage,) and can be used to optimize wagering. A stochastic/Hamiltonian system of sufficient complexity that is perfectly efficient will be characterized by a Normal/Gaussian frequency distribution. However, if it is inefficient, the distribution will have kurtosis. What this means in arbitrage systems, (like the value of financial instruments, over time,) is that price movements have persistence, i.e., the chances of the next movement being like the last is greater than 50%. Everyone does not react instantaneously to market information-which is a systemic inefficiency. (The metrics are that about half of the share holders react to market information on the same day the information came out, about half of the remainder on the second day, and so on-an exponential decay scenario.) So, in a perfectly efficient market system, the chances of the next movement being like the last is 50%. The chances of the next two movements being like the last is 25%, and so on. However, in a slightly inefficient market system, the chances of the next movement being like the last, (using daily median metric numbers,) is about 57%, and the chances of the next two movements being like the last is 32.5%. There is an added advantage to doing things this way-the wagering can be optimized, (i.e., a portfolio management scenario can be implemented,) with F = 2P - 1, where P has a median value of about 0.57. What tsinvest does internally, with the -d5 option, is to construct a table of consecutive like price movements for each stock, (for both positive and negative movements,) and calculates the probability of the next price movement being an up movement, and how much to wager on that probability. John BTW, note that just recognizing price patterns is not sufficient-one has to figure out what to do with that information, too. John Conover writes: > > PBS is airing the program "Electric Money" by Robert Cringely: > > http://www.pbs.org/opb/electricmoney/ > > which has a short section on Doyne Farmer, Norman Packard, and > the Prediction Company: > > http://www.predict.com/html/introduction.html > > John > -- John Conover, john@email.johncon.com, http://www.johncon.com/

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