Workbook for Volume 1 – Part IV - Section #6.b: Foundational Papers of the 19th Century & Before (3.b of 5) – Bayes & Cournot
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For returning readers and subscribers: This post introduces a Revised Version for Volume 1 – Part IV - Section #6.b: Foundational Papers of the 19th Century & Before (3.b of 5) – Bayes & Cournot
Summary:
Volume 1 – Part IV - Section #6.b: Foundational Papers of the 19th Century & Before (3.b of 5) – Bayes & Cournot - This section shows how the development of probabilities provides additional examples of the structural bias created in the 18th Century with the selection of “Expected Value” as the dominant summary statistics for application of the Logic & Statistics Program to decision-making under uncertainty. For instance, in his 2005 paper, “Replacing the Law of One Price with the Price Convergence Law”, Yoram Barzel presents the development of financial theories, including the hypothesis that “Commodities Command the Same Price” that was first expressed in 1838 by Antoine Augustin Cournot in his book “Recherches sur les principes mathématiques de la théorie des richesses” (Research on the Mathematical Principles of the Theory of Wealth), and refined in 1919 by Alfred Marshall in his book “Industry and Trade”. This hypothesis called “Law of One Price” justifies using a financial valuation technique by analogy: “To know the value of tradable goods, such as a security, use the known price of another, but similar security”. The similar security provides the information for a “Prior” probability. This means that the ensemble bias of “Expected Value” can travel upward in economic theories that use probabilistic thinking: Using a probability-weighted average price to create greater similarity & comparability across similar tradable goods in order to apply the hypothesis of the “Law of One Price”, instead of using spot market prices because they change too much or too frequently, introduces an ensemble bias that does take variance into consideration, and thus does not reflect the typical individual outcome. At what point do models with compounding biases stop making sense? When must we fix the “Feet of Clay” of towering theories in order to make good individual investment decisions?
Developing…
”CTRI by Francois Gadenne” writes a business book in three volumes, published serially on Substack for public peer-review. The book connects the dots of life-enhancing practices for the next generation, free of controlling algorithms, based on the lifetime experience of a retirement age entrepreneur, & continuously updated with insights from reading Wealth, Health, & Statistics research papers on behalf of large companies as the co-founder of CTRI.