For those who haven’t seen the movie 21, :), the monty hall problem is you have to choose one of 3 doors, two doors have a goat behind them and one has a car.
Once you have chosen a door, the host shows you one of the three doors with a goat behind it and asks if you want to switch or stick with the original choice that you made. So the question is if you should switch or stick with your original choice.
Mathematically, you have to always switch as you increase your odds from 1/3 to 2/3, there are many sites that explain this.
My question is, what do you do after getting into a trade and have an option to stick/switch, so assume I am bullish on technology stocks, I buy Infosys and stock doesn’t move, So should I stick or switch to TCS? Does this work for stock markets as well?
3 Likes
21 just glorified the Monty hall problem! The origins of this brain teaser goes back to Monty Hall himself, the host of an old US based realty show called 'Lets make a deal'.
The theory of 'variable change' suggest it makes sense to switch when you have new information flowing in the backdrop of multiple variables (more than 2 variables) - in the case of the original problem the variables are 3 hence applicable as the chances of odds flipping in your favor by switching is high.
In case of a trading situation the variables are just 2 - you either make money or you don't. With 2 variables the odds are evenly split - 50 - 50%. Assuming information does not play a critical role here, there is no advantage with switching.
Assuming there is information flow - then the call to either switch or not switch is purely trading/finance wisdom and I guess its got nothing to do with variable change.
Would love to hear other opinions and I must confess, I'm mathematically challenged.
2 Likes
After getting into trade and have an option to stick/switch?
i would prefer switch over…
1 Like
Even if we have an option to stick / to switch, after we buy stocks of INFOSYS and it doesn’t move, it better to stick and wait till it goes bullish rather to switch to TCS.
Yes this work for stock markets as well.
If infosys stocks doesn’t move i will try to switch the stock to TCS.
Be it The Monty Hall Problem or SPR (Stack to Pot Ratio) in poker, both use the concept of ratio or probability to enhance your winning chances. Now, in my opinion, The Monty Hall Problem is definitely not relevant to stock market in its original form. However we might be able to modify/adapt it to make it applicable to stock markets.
Here's one of the ways this can be done. Please see that this is not a standard strategy and it might fail more often than not.
Going with the technology stocks example, Let's say you buy Infosys stock in NSE. Now you need to monitor the movement of CNX IT. If CNX IT moves up or your market reading says CNX IT will go up but Infosys doesn't move, clearly switching to TCS increases your odds of making profit.
PS This is not a standard strategy so do not rely on it. I have just made an attempt to show how The Monty Hall problem can be applied to Stock Market. Also you need to consider the Market Caps and The %change in the stocks under consideration.
3 Likes
Mostly yeah you feel more that you got more options now and You switch but does not work for me for example if I do switch from Infy to TCS, TCS will start moving up… 
