Karel, I think we are at an impasse, therefore we are: impasse ergo sum?
You are probably correct that the Kelly Equation has a low applicability to the typical investment decisions that we tend to make in AIMing....( what are p and E this proposition???)… The equation relates to coin flipping whereas most investment decisions(mine too!) for AIMing, and other techniques, are based on superficial risk analysis and a lot of subjective decision-making.
You wrote:
The Kelly Equation and AIM are largely incompatible, I think. the reason I think so, is a standard piece of investment advice, that IMO also applies to AIM: cut your losses and let your winners run
The analogy that I made with (p,E)applies for cases(rare ones) in which the real applicable probability factors and applicable payouts(multiple events) can be determined. Then the Kelly Equation would still not apply, but there would be some sort of other relationship to determine the optimum investment. The actual relationship would be impossibly complex as a real venture has many events taking lace in its unfolding, all of which with their own probabilities that can be compared to coin flipping. It is even so that if you use a die instead of a coin in a simple die-game that the combinations of possibilities render the Kelly Equation invalid. The case of six payouts on six possible outcomes of the roll of a die are already too complex(it appears) to find a the exact optimum for the bet/cash ratio.
Because a pure probability approach for investing is impossible to execute we use in practice other superficial….incorrect… methods that are based on company profiles, while the real facts behind the curtains that determine what is actually going to happen, simply stay behind the curtains…We bet that things are not as bad as they might be.
This approach is normal, and we use it in engineering every day….not to talk about it’s use in economics! [b[We know that we do not know the facts...but use incorrect information that gets us close enough to our goal. Then, when in rare cases things go wrong, everybody is all of a sudden an expert on the subject and tells us why we screwed up and that we should have known better. We know that this will happen, still we keep using incorrect information because we either have neglected to find information that is already available in our branch of technology, or the correct information does not exist: we do the best we can but we always realise that we are ignorant of the facts no matter how deep we look into the matter before us beforehand...
All people in Manhattan that went to work in the WTC Towers on September 11th last year believed it was safe to do so, even though the events that would lead to their deaths were already unfolding...the facts behind the curtains were unknown to most people on earth, but these facts were facts just the same.
Cutting losses and letting the profits run is a sound investment method, I agree, considering that we normally do not see the facts behind the curtains, and that normally there is no ticking bomb hidden somewhere. Still, cutting the "losses" on a sound company that has a temporary setback is not sound, an letting the profits run may sometime end up in an financial disaster.
I believe that we have reached an impasse on the philosophy of investing and on how profits relate to real risk rather than perceived risks, and that we, I suspect deep down agree on the facts that most things that happen are caused by factors beyond our control, because of our ignorance of what really goes on, when anything goes on!
Conrad
Conrad
AI
