IFA.tv - Probability Machine, Galton Board, Randomness and Fair Price Simulator, Quincunx

Take the Risk Capacity Survey and discover an appropriate portfolio for you: http://ifarcs.com - Visit IFA: http://ifa.com - Videos: http://ifa.tv - Hebner Model: http://hebnermodel.com - Index Funds: The 12-Step Recovery Program for Active Investors: http://indexfundsbook.com - The Fair Price Simulator: An explanation of how random beads falling through an assortment of pins, in the pattern of a quincunx, looks like monthly returns of IFA Index Portfolio 100 over 50 years, ending 2008. See http://ifa.com/portfolios/p100/ - IP100 is a simulated index portfolio, with data going back to Jan 1928. - The machine was named Francis, in honor of Sir Francis Galton who first created such a machine in 1873. (see http://www.ucl.ac.uk/museums/galton/statistics/quincunx.html ). Also see http://en.wikipedia.org/wiki/Bean_machine and http://en.wikipedia.org/wiki/Normal_distribution . Video is narrated by Mark Hebner. Also see http://www.ifa.com/portfolios/p100/#9 , also see Chart number 10 on that page.

From Wiki: In statistics, a random process is a repeating process whose outcomes follow no describable deterministic pattern, but follow a probability distribution, such that the relative probability of the occurrence of each outcome can be approximated or calculated. For example, the rolling of a fair six-sided die in neutral conditions may be said to produce random results, because one cannot compute, before a roll, what number will show up. However, the probability of rolling any one of the six rollable numbers can be calculated, assuming that each is equally likely.

IFA.tv provides webcasts explaining the investing strategies of IFA.com and Mark Hebner's book, Index Funds: The 12-Step Recovery Program for Active Investors. See here: http://indexfundsbook.com.

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[expatinasia62]

Strictly that's "Central Randomness" where the underlying events are independent of one another. That's where the 50% path per pin comes it: even sub event is independent and "perfectly" so.

This is not the only kind of randomness: only the most convenient to calculate and use. If you do not have event independence, where Event 1 influences the probability of Event 2 but both Event 1 and Event 2 are both counted together in the same distribution, then central distributions do not apply.

[IndexFundsAdvisors]

@expatinasia62 Stock market returns are independent variables. The R Squared of First Day Returns vs Next Day Returns on 14,634 daily returns is 0.0052.

[MrMSGMAIL]

what will happend if you turn on the machine and leave the room and never come back?

[IndexFundsAdvisors]

@MrMSGMAIL The machine has a timer that controls the length each cycle of beads falling. It has another timer that can be set between 1 min and 60 minutes and initiates each cycle of beads going through the pins.

[gtacrusher123]

how do you get the balls out

[IndexFundsAdvisors]

@gtacrusher123 The base can be taken off at the back and we can take out beads as they drop down a channel.

[IndexFundsAdvisors]

@artifactingreality Expand the description below the video. I explained this. mark

[qwertybg]

@clipper721 You are wrong. For large number of experiments (large n) Bi(n,p) can be approximated to the Normal distribution N(np;np(1-p)) . Hence the bell shaped curve.

[JustSpeculating]

Great job. I've always loved this concept tied to passive investing. Such an elegant analogy... some active managers will win just due to chance. Even better, account for survivor bias and remove the lowest ones. Even if all managers are just throwing darts, some get to brag about how great they are and the others fade away.

[gtacrusher123]

@IndexFundsAdvisors ok thanks

[clipper721]

@sfsTrader The beads only drop in at one point (centre) and can only travel left or right for a certain distance due to the depth of the drop (there only thirteen rows). So the maximum deviation in one direction is thirteen. This is not a truly random test, it is a machine that has been designed to describe a bell shaped curve, and a bell shaped curve is exactly what you would expect to get if you measure a phenomena over a period of time. So what is your point?

[equilshift]

@equilshift Just thought I might let you know that even the greatest minds that ever lived have struggled over this, and will continue to struggle over it for generations to come. (Indeed, eliminating the randomness "inherent" in our understanding of quantum mechanics was Einstein's white whale, he spent most of his academic career fruitlessly striving to eliminate the need for chance in our description of the universe.)