It's Maths

Mathematics is the root of many disciplines that we learn today. It is very important for us investors. Now we will slowly study history of maths. It may be useful for better evaluation. By now I understand many wants to predict future based on technicals and almost no-one wants to change the future after understanding the basics of TAs...The purpose of all quantitative methods is to understand what is happening around us and to form what we want than to be passive observers...


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In 1654 , a time when the Renaissance was in full flow , the Chevalier de Mere, a French nobleman with a taste for gambling and mathematics, challenged the famed French mathematician Blaise Pascal to solve a puzzle.

The question was how to divide the stakes of an unfinished game of chance between two players when one of them is ahead.

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This problem is not alien to us , cricket fans...

The Duckworth–Lewis method (often written as D/L method) is a mathematical formulation designed to calculate the target score for the team batting second in a limited overs cricket match interrupted by weather or other circumstances. It is generally accepted to be the most accurate method of setting a target score.

Duckworth–Lewis method - Wikipedia, the free encyclopedia

Knowing who will win before the game finish, is a challenge created by two hundred years before by the monk Luca Paccioli...

Accounting students are really happy with the monk Luca Paccioli, as the is the founder of modern accounting of double entry system.

Further Luca Paccioli tutored Leonardo Da Vinci in the multiplication tables.

One problem we face now , in today's world a man is good at only one thing... and like Mr. Hammer only knows to hammer a nail and paid for just doing that...Today we call Renaissance man for the people who are good at many things... so you can be good at music, arts, maths, languages , science and all simultaneously...

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Pascal turned for help to Pierre de Fermat, a lawyer who was also a brilliant mathematician. The outcome of their collaboration was intellectual dynamite.

They discovered the theory of Probability.

Their solution to Paccioli's puzzle meant that people could for the first time make decisions and forecast the future with the help of numbers...

Dear TAs that is what you are doing...now

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I often find Xmart end up with few predictions on a future event (ASI) ... That's good..yet better provide us with probability of each happening....

Date	ASI now	Predict	When	Date of Eval	True/False	Remarks
24-May-16	6,556.36	5800-6700
		6380
		6250

At the time Pascal and Fermat made their breakthrough discovery world was experiencing a wave of innovation.

By 1654 the roundness of earth was an established fact.

Gunpowder which Chinese used for Displays are now used to dust castles.

Artists became conversant with perspectives..

Wealth was pouring into Europe..

Amsterdam stock exchange was flourishing..and by 1630s they were experience Tulip Bubble burst, the first crazy commodity bubble ...and almost similar to how manipulators blow Stock Bubbles at CSE or elsewhere...

http://forum.lankaninvestor.com/t6435-bubbles?highlight=bubbles

When we try to look at probability of an event taking place we consider the co-relations between variables. Plantation companies shares dropping during a time when the commodity ( which the sector produce) prices fall  , is expected.

Yet the market is not always behaving in a predictable manner with transparent relationship among variables.

Many variables affect than one independent and one dependent.

The best example is GDP growth and growth of a Stock Market index. Theoretically there can no argument there should be a very positive co relationship between these two.

Yet this is what happened in a market we all know..



So the market index should show a steep incline, yet this is what happened at CSE




At a glance the 4th best GDP among emerging markets were among the worst performing Indices of the world. This is a rare situation.

This makes things more complex.

It is not GDP growth the independent variable affecting CSE. A manipulated bubble of 2011, SEC strict regulations like price bands, Expropriation Act passing in the parliament are other strong variables affected.

Therefore it will be a very difficult task to grab all relevant variables, weight them and create mathematical formulas to forecast future...

We see lots of forecasts on future performance of CSE based on different charts...

This thread is trying to understand the history of maths that made man to become accurate in predicting resulting less belief in gods as men began to understand that they are not passive objects but active role players who can change the future as they wish.

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[th]Forecast[/th][th]Actual[/th][th]Q2/16[/th][th]Q3/16[/th][th]Q4/16[/th][th]Q1/17[/th][th]2020[/th][th]Unit[/th]

Stock Market	6569	6260	6070	5880	5750	7980	points

Sri Lanka Stock Market (CSE All Share) Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of Sri Lanka Stock Market (CSE All Share) using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations. The forecast for - Sri Lanka Stock Market (CSE All Share) - was last predicted on Friday, May 27, 2016

Source : http://www.tradingeconomics.com/sri-lanka/stock-market/forecast

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Now the problem is are we passive enough to accept above figures or active enough to change the destiny ?

Lets learn maths, economics and see...

OK since above data is not clear I put them in an excel table...

Column1	Last	Q2/16	Q3/16	Q4/16	Q1/17	2020
Currency	147	149	151	152	153	87.7
Stock	6569	6260	6070	5880	5750	7980

Back to Maths History

Mathematicians used probability to evaluate things in other economic areas than allowing it to become a mere toy of gamblers.

By 1725 mathematicians were competing one another in devising tables of life expediencies, and England government was financing itself through the sale of life annuities.

Net result was flourishing Insurance Business in London.

Sample...

Today we select a sample to represent the entire population. Statistical sampling is useful in wine tasting, stock picking, as well as testing new drugs.

In 1703 Gottried von Leibniz commented to the Swiss scientist and Mathematician Jacob Bernoulli that.. Nature has established patterns of originating in the return of events, but only for the most part..

It prompted Bernoulli to invent the Law of Large Numbers and methods of statistical sampling.

In 1703, Abraham de Moivre suggested the structure of the normal distribution -also known as the normal curve- and discovered the concept of standard deviation.

Together these two concepts make up what is popularly known as the Law of Averages and are essential ingredients of modern techniques for quantifying risk.

Bell Shaped curve is seen as the represent of Normal Distribution.

That means in a class room those who are very tall are less and those who are very short are or less and the majority stay closed to the average..

The same bell shape is seen in Marketing as product life cycle (PLC)...

Normal Distribution statistics are used by Rogers , another researcher on market acceptance of new products..

yellow knife wrote:


We see lots of forecasts on future performance of CSE based on different charts...

This thread is trying to understand the history of maths that made man to become accurate in predicting resulting less belief in gods as men began to understand that they are not passive objects but active role players who can change the future as they wish.

*************************************************************


[th]Forecast[/th][th]Actual[/th][th]Q2/16[/th][th]Q3/16[/th][th]Q4/16[/th][th]Q1/17[/th][th]2020[/th][th]Unit[/th]

Stock Market	6569	6260	6070	5880	5750	7980	points

Sri Lanka Stock Market (CSE All Share) Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of Sri Lanka Stock Market (CSE All Share) using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations. The forecast for - Sri Lanka Stock Market (CSE All Share) - was last predicted on Friday, May 27, 2016

Source : http://www.tradingeconomics.com/sri-lanka/stock-market/forecast

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Now the problem is are we passive enough to accept above figures or active enough to change the destiny ?

Lets learn maths, economics and see...

OK since above data is not clear I put them in an excel table...

Column1	Last	Q2/16	Q3/16	Q4/16	Q1/17	2020
Currency	147	149	151	152	153	87.7
Stock	6569	6260	6070	5880	5750	7980

Thanks Dear YK

Eight years later, Daniel Bernoulli, Jacob's nephew and an equally distinguished mathematician and scientist , first defined the systematic process by which more people make choices and reach decisions. Even more important, he propounded the idea that the satisfaction resulting form any small increase in wealth " will be inversely proportionate to the quantity of goods previously possessed."...

With this innocent sounding assertion, Bernoulli explained why King Midas was an unhappy man, why people tend to be risk averse, and why prices must fall if customers are to be persuaded to buy more.

Bernoulli's statement stood as the dominant paradigm of rational behavior for the next 250years and laid the ground work for modern principles of invest management.

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Pathfinder may be interested in this...

Family trees are powerful not only in politics, business but also among intellectuals...

Almost exactly one hundred years after the collaboration between Pascal and Fermat, a dissident English minister named Thomas Byes made a striking advance in statistics by demonstrating how to make better-informed decisions by mathematically blending new information into old information.

Bayes theorem focuses on the frequent occasions when we have sound intuitive judgements about the probability of some event and want to understand how to alter those judgements as actual events unfold.

All the tools we use today in risk management and in the analysis of decision and choice , from the rationality of game theory to the challenges of chaos theory, stem from the developments that took place between 1654 and 1760 , with only two exceptions...

So exception 1

In 1875 Francis Galton, an amateur mathematician who was Charles Darwin's first cousin, discovered regression to the mean, which explains why pride goeth before a fall and why clouds tend to have sliver linings..


Whenever we make any decision based on the expectation that matters will return to " normal " , we are employing the notion of regression to the mean.

Ying Yang writes.

Re: CIND.N0000 (Central Industries)

 by Yin-Yang Today at 11:41 am
In that case, what do you think can make accurate predictions?

Sometime ago, I read and interesting theory; it said, predictions can be accurate for a group of incidents but at the same time not accurate for any of individual incidents.

For example, one can say, the height of a typical Sri Lankan is exactly 5 feet and 5 inches and it could be accurate but at the same time, if we sample 100 individual, none of them could be exactly that tall.

May be, what they say is true, 'averaging' is not a good investment strategy

Its Maths....

Exception 2

This finding is rather new than findings of 1700s and 1800s... Seems certain things remained to be discovered even in 1900s....

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In 1952 Nobel Laureate Harry Markowitz, then a young graduate student studying operations research  at the University of Chicago demonstrated mathematically why putting all your eggs in one basket is an unacceptably risky strategy and why diversification is the nearest an investor or business manager can ever come to a free lunch.

This revelation touched off the intellectual movement  that revolutionized Wall Street, corporate finance, and business decisions around the world: its effect are still being felt today.

So a Sri Lankan investor who invest in CSE as well as Dollars will be safe if following is right...and shifting the percentage of allocation  by 2020..

Column1	Last	Q2/16	Q3/16	Q4/16	Q1/17	2020
Currency	147	149	151	152	153	87.7
Stock	6569	6260	6070	5880	5750	7980

How reliable is such predictions.. If some one is 100% sure of TAs and other researches he can take perfect decisions .. Yet , any decision by political room can make unexpected drastic changes...

Barbados decided to cut salary instead of floating exchange...

SL today increased vehicle tax to such a level to almost stop importing and to affect Forex...

There is a persistent tension between those who assert that the best decisions are based on quantification of numbers, determined by the patterns of past, and those who base their decisions on more subjective degrees of belief about the uncertain future.

This is a controversy that has never been resolved....

Can past determine the future ?

Very good thread. Thanks YK.