V.3:5 (168-170): Gambler's Paradox by Clifford J. Sherry

Gambler's Paradox by Clifford J. Sherry

If you know the price of a commodity today, can you predict the price tomorrow? A week from tomorrow? A month from tomorrow? Can you predict whether the price will increase or decrease and by how much? The answer to that question depends on who you ask. Some people, like technical analysts, who use such things as charts and moving averages, believe that you can. Others do not.

One reason this question is so difficult to answer is there is no general agreement about how commodity prices are 'generated.' If the underlying 'process' is random and/or independent, you probably cannot 'predict' price movement. But, if this is not true, if it is either non-random and/or dependent, some 'pattern' exists in commodity prices, and with the appropriate 'tools' you should be able to detect the 'pattern.' It is important to understand that randomness and independence are separate and distinct characteristics.

From a technical standpoint, randomness and independence are relatively difficult to define, but an analogy will help. For example, fill a small urn with 50 white and 50 black balls. Take out one ball at a time, write down its color and replace it, take out another, etc. If you do this repeatedly, you will 'generate' a random and independent sequence. It is random because each and every ball has an equal chance of being selected. It is independent because the choice of the first ball had no effect on the selection of the second and succeeding balls.