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28 Oct 2016 (AFR) – The test for investors who might need more maths skills

[COMMENT: A great article about investing, gambling and behavioural and cognitive biases.]

(28 October 2016, AFR, p31, by Tracy Alloway)

‘ “You’re invited to a talk by a hedge fund manager who was a partner at a fund that famously flopped about 20 years ago. You turn up, hoping to hear some valuable insights, or at least some entertaining tales, but instead you are offered a stake of $25 to take out your laptop to bet on the flip of a coin for 30 minutes. You’re told the coin is biased to come up heads with a 60 per cent probability, and you can bet as much as you like on heads or tails on each flip. You will be given a cheque for however much is in your account at the end of the half hour.” ‘

‘So begins a new paper published by Victor Haghani, co-founder of the collapsed hedge fund Long-Term Capital Management who’s now CEO of Elm Partners Management, a portfolio of low-cost index and exchange-traded funds. Co-authored with Elm Strategist and Pacific Investment Management portfolio manager Richard Dewey, the results of the experiment highlight an apparently gaping hole in the quantitative knowledge of “financially trained” individuals at a time when Wall Street is fiercely debating the worth of active investment management.’

‘That’s because the best betting strategy for such an experiment is dictated by mathematics – and specifically by the work of one John Larry Kelly jnr. The formula he developed in the 1950s – later known as the Kelly Criterion – has long been used by gamblers to maximise their profits through the optimal investment of a fraction of their bankroll.’ <snipped…>

For more details also try:

Read more at (might need AFR login access, or try:

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