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Markets are Anti-Inductive — LessWrong

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I suspect there's a Pons Asinorum of probability between the bettor who thinks that you make money on horse races by betting on the horse you think will win, and the bettor who realizes that you can only make money on horse races if you find horses whose odds seem poorly calibrated relative to superior probabilistic guesses. There is, I think, a second Pons Asinorum associated with more advanced finance, and it is the concept that markets are an anti-inductive environment. Let's say you see me flipping a coin. It is not necessarily a fair coin. It's a biased coin, and you don't know the bias. I flip the coin nine times, and the coin comes up "heads" each time. I flip the coin a tenth time. What is the probability that it comes up heads? If you answered "ten-elevenths, by Laplace's Rule of Succession", you are a fine scientist in ordinary environments, but you will lose money in finance. In finance the correct reply is, "Well... if everyone else also saw the coin coming up heads...

x Markets are Anti-Inductive — LessWrong Financial Investing Efficient Market Hypothesis Goodhart's Law Frontpage 97 Markets are Anti-Inductive by Eliezer Yudkowsky 26th Feb 2009 4 min read 62 97 I suspect there's a Pons Asinorum of probability between the bettor who thinks that you make money on horse races by betting on the horse you think will win, and the bettor who realizes that you can only make money on horse races if you find horses whose odds seem poorly calibrated relative to superior probabilistic guesses. There is, I think, a second Pons Asinorum associated with more advanced finan

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