IFA.tv - From Chaos to Order on the Galton Machine -- Representing the Returns of Capitalism
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Published on Dec 23, 2009
Take the Risk Capacity Survey: http://ifarcs.com - Visit IFA http://ifa.com - Learn about the Hebner Model: http://hebnermodel.com - The Book: http://indexfundsbook.com - Complete the Retirement Analyzer: http://ifa.com/ra - Call 888-643-3133 - The random walk of stock market prices and the efficient market hypothesis are simulated by physical action of beads hitting a pattern of pins. The Efficient Market Hypothesis says prices are fair. If the expected return of an investment is 1% per month, about half the monthly returns will below and above that average return. So the fair price set at the beginning of each month sets the chance that future returns will be 50% higher and 50% lower than the expected return. The further the returns deviate from the average, the less likely they are to occur. The red bar overlay represents 600 simulated monthly returns of IFA's Index Portfolio 100. As you can see the distribution of the beads is similar to the index portfolio.
When this shape (or distribution) is found to occur with regard to the output of a system (such as monthly returns of capitalism over 50 years), the implications for the system producing it are often profound. Let us see what Francis Galton had to say about it. I know of scarcely anything so apt to impress the imagination as the wonderful form of cosmic order expressed by the law of error. A savage, if he could understand it, would worship it as a god. It reigns with severity in complete self-effacement amidst the wildest confusion. The huger the mob and the greater the anarchy, the more perfect is its sway. Let a large sample of chaotic elements be taken and marshalled in order of their magnitudes, and then, however wildly irregular they appeared, an unexpected and most beautiful form of regularity proves to have been present all along. Arrange statures side by side in order of their magnitudes, and the tops of the marchalled row will form a beautifully flowing curve of invariable proportions; each man will find, as it were, a pre-ordained niche, just of the right height to fit him, and if the class-places and statures of any two men in the row are known, the stature that will be found at every other place, except towards the extreme ends, can be predicted with precision.
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