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Recently, Tiger Woods was quoted concerning Rory McIlroy and his perceived inconsistency. Tiger alluded to the fact that Rory’s aggressive golf style leads to either good or bad streaks saying: “When he gets it going, he gets it going. When it gets going bad, it gets going real bad.” EffecCvely Rory takes on the risk of accepCng bad rounds for the chance of having great rounds. Variance and Randomness 1 of 13

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Page 1: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

Recently,  Tiger  Woods  was  quoted  concerning  Rory  McIlroy  and  his  perceived  inconsistency.  Tiger  alluded  to  the  fact  that  Rory’s  aggressive  golf  style  leads  to  either  good  or  bad  streaks  saying:  “When  he  gets  it  

going,  he  gets  it  going.  When  it  gets  going  bad,  it  gets  going  real  bad.”  EffecCvely  Rory  takes  on  the  risk  of  accepCng  bad  rounds  for  the  chance  of  having  great  

rounds.    

Variance  and  Randomness  

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Page 2: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

A  study  was  conducted  in  which  researchers  took  the  standard  deviaCon  of  round-­‐by-­‐round  scores  of  players  

who  have  won  at  least  2  majors  since  1958.  Rory  McIlroy  had  the  highest  standard  deviaCon.  The  

numbers  from  the  study  supported  Tiger’s  argument.  

Variance  and  Randomness  

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Page 3: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

The  researchers  then  decided  to  split  players’  careers  into  random  groups.  What  they  discovered  was  that  the  correlaCon  between  round-­‐by-­‐round  scoring  standard  deviaCon  was  actually  0.15.  This  means  that  what  Tiger  

claimed  was  actually  a  product  of  randomness.  

Variance  and  Randomness  

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The  researchers  conclude  that:  “the  human  mind  is  wired  to  find  pa9erns  and  a9ribute  significance  to  sequences  that  o<en  turn  out  to  be  totally  random.”  

This  is  also  known  as  apophenia.    

Variance  and  Randomness  

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Other  examples  of  apophenia:    

We  all  know  the  popular  trading  saying,  “sell  in  may,  go  away.”  The  common  reasoning  behind  this  strategy  is  that  it  is  perceived  that  the  summer  months  generally  

underperform  compared  to  the  winter  months.    

Variance  and  Randomness  

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Page 6: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

 This  adage  is  one  example  of  investors  seeing  a  paSern  where  none  exist.  The  reality  is  that  since  1927,  the  

returns  for  the  period  of  May-­‐August  were  .70%,  almost  idenCcal  the  the  .78%  average  for  all  the  other  months.  The  only  month  that  seemed  to  vastly  underperform  is  

September  with  an  average  return  of  -­‐1.07%.  

Variance  and  Randomness  

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A  few  other  examples  of  seeing  ‘paSerns’  where  they  do  not  exist  include:  

Variance  and  Randomness  

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Page 8: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

Variance  and  Randomness  

Elvis Bacon

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Page 9: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

Variance  and  Randomness  

Kermit the Frog Brussel Sprout

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...  

Variance  and  Randomness  

Rory Mcllroy Danish

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Over  20  coin  flips,  there  is  a  50%  chance  of  four  heads  appearing  in  a  row.  In  the  long  run,  a  coin  flip  will  be  

50%  heads  and  50%  tails.    However  in  a  short  period  of  Cme,  a  wide  variety  of  probabiliCes  are  expected,  including  some  runs  that  seem  highly  improbable.  

   

Variance  and  Randomness  

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Another  famous  example  of  the  clustering  illusion  is  known  as  the  “Texas  sharpshooter  fallacy,”  in  which  a  person  shoots  a  gun  at  the  side  of  a  barn  and  then  

draws  the  bullseye  around  the  biggest  cluster  of  bullets,  claiming  to  be  a  sharpshooter.  

   

Variance  and  Randomness  

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Page 13: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

 One  reason  people  tend  to  find  false  paSerns  is  known  

as  the  “clustering  illusion,”  or  the  tendency  to  incorrectly  interpret  the  streaks  or  clusters  that  are  

inevitable  in  small  samples  of  random  distribuCons.  This  can  also  be  described  through  the  random  streaks  of  

heads  or  tails  in  a  large  series  of  coin  flips.    

H  T  T  H  T  H  H  H  H  H  T  T  H  T  H  T  H  H  

Variance  and  Randomness  

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Page 14: Variance)and)Randomness) - Amazon S3 · Variance)and)Randomness) DISCLAIMER:+The)purpose)of)this)material)is)to)demonstrate))markettrading)techniques)and)strategies)designed)to)give)you)the)skills)and

Variance  and  Randomness  DISCLAIMER:  The  purpose  of  this  material  is  to  demonstrate    market  trading  techniques  and  strategies  designed  to  give  you  the  skills  and  confidence  to  manage  your  own  investments.      The  risk  of  loss  in  trading  securiCes,  opCons,  futures  and  forex  can  be  substanCal.  You  must  consider  all  relevant  risk  factors,  including  your  own  personal  financial  situaCon,  before  trading.  OpCons  involve  risk  and  are  not  suitable  for  all  investors.      You  are  assuming  the  enCre  risk  of  any  and  all  trades  placed  in  the  stock  market.  Due  to  the  Cme-­‐  criCcal  nature  of  trading,  the  varying  fees  charged  by  brokerages,  and  the  acCvity  of  other  market  parCcipants,  tastytrade  cannot  guarantee  that  similar  trades  you  place  will  mirror  the  exact  performance  of  the  tastytrade  por]olio.      tastytrade  is  not  a  licensed  financial  advisor,  registered  investment  advisor,  registered  broker-­‐dealer  or  FINRA|SIPC|NFA-­‐member  firm.  tastytrade  does  not  provide  investment  or  financial  advice  or  make  investment  recommendaCons.  tastytrade  is  not  in  the  business  of  transacCng  trades,  nor  does  tastytrade  agree  to  direct  your  commodity  accounts  or  give  trading  advice  tailored  to  your  parCcular  situaCon.  Nothing  contained  in  tastytrade’s  por]olio  demonstraCon  consCtutes  a  solicitaCon,  recommendaCon,  promoCon,  or  endorsement  of  any  parCcular  security,  other  investment  product,  transacCon  or  investment.      BY  USING  THE  TASTYTRADE  WEB  SITE  AND  ACCESSING  THE  TASTYTRADE  MATERIALS,  YOU  AGREE,  AT  ALL  TIMES,  TO  INDEMNIFY,  DEFEND,  AND  HOLD  TASTYTRADE  (INCLUDING  ANY  OF  ITS  AFFILIATES,  OR  ITS  RESPECTIVE  SUCCESSORS  AND  ASSIGNS,  OR  ANY  OF  ITS  RESPECTIVE  OFFICERS,  DIRECTORS,  EMPLOYEES,  AGENTS,  REPRESENTATIVES,  LICENSORS,  OPERATIONAL  SERVICE  PROVIDERS,  ADVERTISERS,  OR  SUPPLIERS)  HARMLESS  FROM  AND  AGAINST  ANY  AND  ALL  CLAIMS,  ACTIONS,  DEMANDS,  SUITS,  LOSSES  AND  COSTS  (INCLUDING  ATTORNEYS’  FEES)  RESULTING  FROM  TRADES  YOU  PLACE  IN  THE  MARKET.  TASTYTRADE  SHALL  NOT  BE  LIABLE  FOR  ANY  LOSS  OR  DAMAGE,  OF  ANY  KIND,  DIRECT  OR  INDIRECT,  IN  CONNECTION  WITH  OR  ARISING  FROM  USE  OF  EDUCATIONAL  SERVICES  PROVIDED  AS  PART  OF  THIS  PORTFOLIO  DEMONSTRATION.      


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