A Brief Excursion into Probabilities
There is a mathematical demonstration of what would happen, what must happen,
if a large number of men were set to playing a game of pure chance against
each other. The demonstration is interesting, but the reader must determine
for himself whether or not it si analogous to Wall Street speculation.
Here it is:
Let us have 400,000 men (and women) engage in this contest at one time. (Something like the number in this country who try being speculators.) We line them up, facing each other in pairs, across a refectory table miles long. Each player is going to play the person facing him a series of games, the game chosen being a matter of pure luck, say matching coins. Two hundred thousand on one side of the table and 200,000 on the other side.
If the reader is at all mathematically inclined he should cease reading and work out for himself what is now bound to occur. Otherwise:
The referee gives a signal for the first game and 400,000 coins flash in the sun as they are tossed. The scorers make their tabulations, and discover that 200,000 people are winners and 200,000 are losers. Then the second game is played. Of the original 200,000 winners, about half of them win again. We now have about 100,000 who have won two games and an equal number who have bees so unfortunate as to lose both games. The rest have so far broken even. The simplest thing from now on is to keep our eyes on the winners. (No one is ever much interested in the losers, anyway.)
The third game is played, and of the 100,000 who have won both games half of them are again successful. These 50,000, in the fourth game, are reduced to 25,000, and in the fifth to 12,500. These 12,5000 have now won five straight without a loss and are no doubt beginning to fancy themselves as coin flippers. They feel they have an “instinct” for it. However, in the sixth game, 6250 of them are disappointed and amazed to find that they have finally lost, and perhaps some of them start a Congressional investigation. But the victorious 6250 play on and are successively reduced in number until less than a thousand are left. This little band has won some nine straight without a loss, and by this time most of them have at least a local reputation for their ability. People come from some distance to consult them about their method of calling heads and tails, and they modestly give explanations for how they have achieved their success. Eventually there are about a dozen men who have won every single time for about fifteen games. These are regarded as the experts, the greatest coin flippers in history, the men who never lose, and they have their biographies written.
Admittedly, it is preposterous to suggest that stock speculation is like coin flipping. I know that there is more skill to stock speculation. What I have never been able to determine is … how much more?
Schwed, Fred Jr. Where Are the Customers’ Yachts? Or A Good Hard Look At Wall Street, John Wiley and Sons, Inc. 1995, pp. 159-161.