The world does not work with absolute certainty, but the strategic decisions we choose have some impact on future results. The irony seems to be heightened by those who do not understand much of statistical duration. Adequate understanding of this topic makes the investor more informed about any business or personal desires.
The concept is simple.
E = expected duration
P (w) = Probability of winners
S (w) = Average size of the winner
P (l) = Probability of losers
S (l) = Average size of the loser
E = [P(w)*S(w)]-[P(l)S(l)]
For example, let’s look at New Zealand financial companies. They are committed to providing retail investors with just over the interest rate on government bonds, as long as their own investments are not subject to adjustments or utilization. Historically, credit markets have a positive relationship with the general economy, and the world has experienced at least two years of recession every decade, or two out of every 10 years. From this we can conclude that these companies will not end every year profitably.
Ie the rough probability of losing a year then is 2/10 = 0.2 or 20%, and the probability that they will end each year profitably is 1-2 / 10 = 0.8 or 80% at best. They offer retail investors annual rates of approximately 9x% (I will round them to 10%) in the years in which they set targets, and in the sword year the average investor seems to lose from 30% to 70%, an average of 50%.
So can the average retail investor “expect” to make a profit in the long run using these companies?
Probability of a winning year: (80% or 0.8)
Average profit of the investor: (10% or 0.1)
Probability of a bad year: (20% or 0.2)
Average loss of the investor: (50% or 0.5)
E = (0.8) (0.1) – (0.2) (0.5)
E = 0.08-0.1
E = -0.02
The negative expected duration suggests that a net loss is likely to occur in the long run. In fact, the average roulette player has a less negative expected duration than the upper; in other words, you will probably lose less money playing roulette in the casino than investing in financial companies.
To make a profit or get a bigger prize consistently, you need your country’s chances. Positive expected duration is one of the few ways to verify this. So learn the math and make wiser decisions.