Monday, October 25, 2010

The Ponzi Scheme

I read this in "Fooled by Randomness" by Nassim Nicolas Taleb and it appealed to my darker side. (Please note I have 2 sides one is dark and the other one is darker). So, imagine one fine day I decide to become a share market pandit and start predicting the future of the market on a monthly basis.My objective is to fool some people by making him believe that I do possess some genuine know how about the market and thus can actually forecast the future of the market. (But actually I don't know a thing about the market).Can I do that?

Ok, so I start with selecting 10000 random people and send them an emails. To 5000 people I send an email stating that the market will go up and to the remaining 5000 that the market will go down. Ok now let me do this systematically...

Jan: Prediction Group A (5000 people) - Market will go up , Group B (5000 people) - Market will go down
Actual outcome - Market goes down.

Feb : I dump contact Group A but from Group B, I send another email
Group C : 2500 people - market will go up; Group D: Market will go down
Actual outcome : market goes up

Mar: I dump group D, and send another email
Group E (1250 people) - market will go up, Group F: Market will go down..

and so on...

In April I will have 625, in May 312, in Jun 156, in July I would've accurately predicting the fate of the share market to 78 lucky people seven times in a row...

Now, imagine that you are one of these lucky people who has received this email 7 times in a row and before you receive the 8th one, the I send another email asking you to invest in a share or mutual fund... would you invest?