"I've flipped heads with this coin five times consecutively, so the chance of tails coming out on the sixth flip is much greater than heads."
I have no problem understanding this fallacy when it comes to coin flipping bets, but I have a hard time understanding how exactly it applies to the stock market. With coin-flipping, the probabilities of heads and tails never change, so for the fallacy to work with the stock market, the probabilties would have to be static aswell. Afterall, the market is normalized with fat tails. But are the probabilities of the stock market really static like in the coin flips?
This is where I get lost. If the market keep flipping tails, which means that valuations gets lower and lower, at some point the valuation has to get to a point where it just can't go any lower. And at this point, the probabilities has to change so that you will be flipping heads with a greater successrate (In my mind atleast). This is different from the coin-flip, where to probabilties is always static. So what am I missing? Why am I wrong?
Submitted February 11, 2017 at 03:07PM by kCinvest http://ift.tt/2l18g5i
