07.06.09
Randomness & Joe DiMaggio
I encourage all my readers to take a detour to the Wall Street Journal and read the article The Triumph of the Random. The importance of randomness in our lives cannot be overstated. One great example from the article concerns Joe Dimaggio’s 56-game hitting streak, by far the longest ever in baseball. This seems like an incredible feat, and for any one man it is. But consider that professional baseball has been played in the United States for over 100 years and over that time thousands of baseball players have played tens of thousands of 60-game stretches. So it is not unlikely that someone would have put together such a long hitting streak. A couple researchers conducted a simulation of 10,000 potential histories of baseball:
The researchers found that 42% of the simulated histories had a streak of DiMaggio’s length or longer. The longest record streak was 109 games, the shortest, 39. In those 10,000 universes, many other players held the record more often than DiMaggio. Ty Cobb, for example, held it nearly 300 times.
As investors or traders, we must be students of the probable, not of the actual. Multiple times I have suffered a large loss on a trade and considered it a good trade, while I have enjoyed large gains on what I considered to be bad trades. What matters is not the actual outcome, but the probability of a good outcome.
The author of the above-linked article, Leonard Mlodinow, has also written a book on the subject, The Drunkard’s Walk: How Randomness Rules Our Lives, and I recommend checking it out.
Yngvai said,
July 6, 2009 at 3:27 pm
I’m reading “Fooled by Randomness” right now which is right along these lines. Nassim Teleb talks about the “alternative outcomes” that you refer to here with the DiMaggio example.
Daniel M. Ryan said,
July 6, 2009 at 9:58 pm
If you don’t mind me being persnickity about it, outcomes that are more disappointing than randon chance indicates deviate from randomness too. Behavioral finance owes a lot of its credibility to the fact that the typical mutual fund, even after transaction costs, tends to perform a little worse than random chance suggests.