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A Mathematician Plays the Stock Market - John Allen Paulos 332.632 Pau

1. Biases
2. Confirmation bias - Jersey driver
3. Status quo bias - we like to keep things as they are
4. Endowment effect - 2 endow one's holdings w/> value then they have simply bcuz 1 holds them
5. Avoiding Losses (loss aversion) - people take > risks to avoid losses than 2 obtain gains
6. Mental Accounts - you start w/$15 at casino, make $1 million, lose all and think you lost $15 bucks
7. Research Bayes Thereom
8. Self-fulfilling prophecy
9. data mining
10. survivorship bias
11. Markov chains
12. DC Sniper Probability Problem
13. Parrando's paradox
14. Gambler's fallacy - coin flips are governed by a probablistic rubber band
15. Newsletter Scam - 64,000 names 1/2 get buy and 1/2 get sell stock xyz, repeated until 7 in a row for 1000 people and charge high rate for 8th pick
16. People have difficulty simulating a series of coin flips
17. Benford's Law = #'s start with 1 30% of time, 2 abt 18%, 3 12.5%...9 < 5% from distributions of distributions
18. Compound Interest formula = P * (1 + r)^t, where Principle, Rate, Time in years
19. Quarterly compounding = A = P(1 + r/n) ^ (n*t)
20. Continuous compounding = P * e ^ (r * t) where e = 2.718
21. Discounting - determining the Present Value of Future money
22. Avg vs. Geometric return = if 80% up and -60% down per week, start w/10K, avg = 1.4mm and geo = $1.95
23. Buy stocks with PEG < .5 and sell with PEG > 1.5
24. Buy stocks w/low P/B ratio or low p/s ratio
25. 35 stocks with highest rate of return and 35 w/lowest rate reversed 3 - 5 yrs later
26. Regression to mean
27. Value investing over 3 - 5 year period does better than growth investing
28. Puzzle 3 men at hotel convention
29. Expected value <> Value Expected
30. Expected value = Avg of its values weighted according to their probablity
31. Estimate stock will increase 1% pr = 95%, down 60% pr = 5%
32. Expected value = (.01 * .95) + (-0.6 * .05) = -2.1%
33. Value expected = +1%
34. Central Limit Theorem - avgs and sums of sufficent # of chance dependant quatities are always normally distributed
35. covariance - between 2 stocks is the degree to which they vary together
36. a chg in one is proportional 2 a chg in the other
37. goal is to find stocks w/negative covariance
38. There aer > funds than stocks
39. A fund is a set of stocks
40. If there are n stocks there are 2^n subsets
41. Pollitically incorrect sectors (tobacco, alcohol, defense, fast-food, gambling)
42. Single index model(?)
43. Sharpe ratio = (rtn - risk free rtn) / volatility
44. CAPM = Capital Asset Pricing Model
45. Systemic Risk = is related to movement in the market. Can be eliminated or diversified away
46. Non-systemic risk = idiosyncratic to stock of portfolio
47. Criticism of Beta - problem of forcing a non-linear world into a linear model
48. Complex behavior can result from simple rules of interaction
49. Non-linear Systems - hit a rack of billiard balls two times and you get different results, even if intial hit appears the same
50. Power Laws
51. When volume is high trades are influenced by few popular nodes
52. * Mutual funds
53. * Analysts
54. * Media outlets
55. becoming aligned in teh sentiments
56. This alignment creates extreme price movement
57. A contagious alignment of this handful of very popular, connected, influential nodes will occur > frequently than people expect
58. Extreme price movement will occur > frequently than people expect
59. EMH - Efficicient Market Hypothesis. If people believe it, it doesn't exist, if people don't believe it, it exists
60. Prisner's Dilema
61. Game Theory
62. Neural Networks
63. Don't succumb 2 hype & enthusiasm
64. Don't put too many eggs in one basket
65. Don't forget to insure against sudden drops
66. Don't buy on margin
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	1.	Biases
	2.	Confirmation bias - Jersey driver
	3.	Status quo bias - we like to keep things as they are
	4.	Endowment effect - 2 endow one's holdings w/> value then they have simply bcuz 1 holds them
	5.	Avoiding Losses (loss aversion) - people take > risks to avoid losses than 2 obtain gains
	6.	Mental Accounts - you start w/$15 at casino, make $1 million, lose all and think you lost $15 bucks
	7.	Research Bayes Thereom
	8.	Self-fulfilling prophecy
	9.	data mining
	10.	survivorship bias
	11.	Markov chains
	12.	DC Sniper Probability Problem
	13.	Parrando's paradox
	14.	Gambler's fallacy - coin flips are governed by a probablistic rubber band
	15.	Newsletter Scam - 64,000 names 1/2 get buy and 1/2 get sell stock xyz, repeated until 7 in a row for 1000 people and charge high rate for 8th pick
	16.	People have difficulty simulating a series of coin flips
	17.	Benford's Law = #'s start with 1 30% of time, 2 abt 18%, 3 12.5%...9 < 5% from distributions of distributions
	18.	Compound Interest formula = P * (1 + r)^t, where Principle, Rate, Time in years
	19.	Quarterly compounding = A = P(1 + r/n) ^ (n*t)
	20.	Continuous compounding = P * e ^ (r * t) where e = 2.718
	21.	Discounting - determining the Present Value of Future money
	22.	Avg vs. Geometric return = if 80% up and -60% down per week, start w/10K, avg = 1.4mm and geo = $1.95
	23.	Buy stocks with PEG < .5 and sell with PEG > 1.5
	24.	Buy stocks w/low P/B ratio or low p/s ratio
	25.	35 stocks with highest rate of return and 35 w/lowest rate reversed 3 - 5 yrs later
	26.	Regression to mean
	27.	Value investing over 3 - 5 year period does better than growth investing
	28.	Puzzle 3 men at hotel convention
	29.	Expected value <> Value Expected
	30.	Expected value = Avg of its values weighted according to their probablity
	31.	Estimate stock will increase 1% pr = 95%, down 60% pr = 5%
	32.	Expected value = (.01 * .95) + (-0.6 * .05) = -2.1%
	33.	Value expected = +1%
	34.	Central Limit Theorem - avgs and sums of sufficent # of chance dependant quatities are always normally distributed
	35.	covariance - between 2 stocks is the degree to which they vary together
	36.	a chg in one is proportional 2 a chg in the other
	37.	goal is to find stocks w/negative covariance
	38.	There aer > funds than stocks
	39.	A fund is a set of stocks
	40.	If there are n stocks there are 2^n subsets
	41.	Pollitically incorrect sectors (tobacco, alcohol, defense, fast-food, gambling)
	42.	Single index model(?)
	43.	Sharpe ratio = (rtn - risk free rtn) / volatility
	44.	CAPM = Capital Asset Pricing Model
	45.	Systemic Risk = is related to movement in the market. Can be eliminated or diversified away
	46.	Non-systemic risk = idiosyncratic to stock of portfolio
	47.	Criticism of Beta - problem of forcing a non-linear world into a linear model
	48.	Complex behavior can result from simple rules of interaction
	49.	Non-linear Systems - hit a rack of billiard balls two times and you get different results, even if intial hit appears the same
	50.	Power Laws
	51.	When volume is high trades are influenced by few popular nodes
	52.	* Mutual funds
	53.	* Analysts
	54.	* Media outlets
	55.	becoming aligned in teh sentiments
	56.	This alignment creates extreme price movement
	57.	A contagious alignment of this handful of very popular, connected, influential nodes will occur > frequently than people expect
	58.	Extreme price movement will occur > frequently than people expect
	59.	EMH - Efficicient Market Hypothesis. If people believe it, it doesn't exist, if people don't believe it, it exists
	60.	Prisner's Dilema
	61.	Game Theory
	62.	Neural Networks
	63.	Don't succumb 2 hype & enthusiasm
	64.	Don't put too many eggs in one basket
	65.	Don't forget to insure against sudden drops
	66.	Don't buy on margin