Fascinating Book: Calculated Bets
Yesterday I read a book that I can recommend because it was both interesting and informative. Calculated Bets: Computers, Gambling, and Mathematical Modeling to Win
The interesting thing about the book is that the author’s goal is quite similar to what many people do when they trade stocks (or other assets): They make educated bets and try to find a system that consistently makes money.
How is betting on Jai Alai similar to trading stocks?
Steven’s approach is to extract the consistent characteristics of the players and find out when a given player is more likely to win. Each game played has an element of chance, and predicting the winner is complicated by the fact that the starting order of the players is a major factor in who wins. What is really great about the book is that Steven explains in detail how he calculates the odds of who is most likely to win, and filters out the randomness of the game.
In trading terms, this is known as the edge. The edge is the advantage a trader has when he opens up a position, based on the likelihood of making money on that trade. Most traders have no idea what their edge is, and are merely following a “hot tip” or information derived from technical analysis. Although technical analysis can generate an edge, most people never test or measure it.
Another great point about the book is that it shows that you don’t have to be right all the time to make money. It turns out that even a small edge (say 5% or 10%) is enough to create successful trading systems. The important part is to understand that we should have an edge in trading, and that we need some way to measure it.
Consider the edge in Vegas or Atlantic City. At the casino, the edge is actually against us, in favor of the house. Every game gives the casino an advantage. The only exception is having the ability to count cards in Blackjack, but I don’t know if it is a good idea to go to Vegas to win by counting cards. It always seems to me that if you do demonstrate the ability to win consistently, someone like Robert De Niro’s character in Casino will make sure that you never come back.
The whole point of the comparison with the casino is that most people who trade (or invest) are really just gambling. They don’t know the rules of the game, and the odds are stacked against them. That’s why we are developing Automated Trading systems. These systems incorporate an edge, as well as all the other ingredients required for successful trading. We believe that Automated Trading systems will revolutionize the investment industry.
Related posts:
- The Little Book that Beats the Market
- Automated Trading and Artificial Intelligence
- Automated Trading and Futures
- Automated Trading and Options
- How To Level The Billionaire Playing Field
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
