Comments on: Phase 1: Determine what problem you are going to solve http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/ Droplets of Yes and No Fri, 31 Dec 2010 05:48:28 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: jerry chen http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1556 jerry chen Fri, 31 Mar 2006 18:46:23 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1556 hello nick, are you familiar with the Kelly Criterion? i have been reading this book called Fortune's Formula by Poundstone and it talks about this famous equation. it's based on Information Theory and was used for beating the stock market. basically it goes like this, assuming you know in advance the probability of winning a wager and you know the odds you are paid per win, there are two extremes in betting strategies: bet everything you got. bet nothing. both strategies are inadequate, and in order to maximize your chances, there is an ideal middleground that can be calculated. introduction: http://www.investopedia.com/articles/trading/04/091504.asp derivation: http://www.jimgeary.com/poker/letters/KELLY.HTM the original formulation as described on wikipedia goes like this: f = (bp - q) / b where: f = ratio of entire bankroll to place in each bet b = odds paid per win (ratio of bet) p = chance of winning q = chance of losing (= 1 - p) a friend of mine was interested in the situation where only partial loss is incurred in a bad guess (ie. lose 1/3 your bet instead of 100%). i did the math and i found the new equation to be: f = (bp - qc) / bc where: f = ratio of entire bankroll to place in each bet b = odds paid per win (ratio of bet) c = punishment per loss (ratio of bet) p = chance of winning q = chance of losing (= 1 - p) it's very elegant.. except the equation explodes when you plug 0 into either b or c. hello nick,

are you familiar with the Kelly Criterion? i have been reading this book called Fortune’s Formula by Poundstone and it talks about this famous equation. it’s based on Information Theory and was used for beating the stock market.

basically it goes like this, assuming you know in advance the probability of winning a wager and you know the odds you are paid per win, there are two extremes in betting strategies: bet everything you got. bet nothing. both strategies are inadequate, and in order to maximize your chances, there is an ideal middleground that can be calculated.

introduction:
http://www.investopedia.com/articles/trading/04/091504.asp

derivation:
http://www.jimgeary.com/poker/letters/KELLY.HTM

the original formulation as described on wikipedia goes like this:

f = (bp – q) / b
where:
f = ratio of entire bankroll to place in each bet
b = odds paid per win (ratio of bet)
p = chance of winning
q = chance of losing (= 1 – p)

a friend of mine was interested in the situation where only partial loss is incurred in a bad guess (ie. lose 1/3 your bet instead of 100%).
i did the math and i found the new equation to be:

f = (bp – qc) / bc
where:
f = ratio of entire bankroll to place in each bet
b = odds paid per win (ratio of bet)
c = punishment per loss (ratio of bet)
p = chance of winning
q = chance of losing (= 1 – p)

it’s very elegant.. except the equation explodes when you plug 0 into either b or c.

]]> By: Nick http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1555 Nick Mon, 27 Mar 2006 14:10:11 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1555 Very cool! Thank you Jerry, that is quite a list! Looks like I'll never be able to say "I've got nothing to read" again... ;) -Nick Very cool! Thank you Jerry, that is quite a list! Looks like I’ll never be able to say “I’ve got nothing to read” again… ;)

-Nick

]]> By: jerry chen http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1554 jerry chen Sun, 26 Mar 2006 08:39:28 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1554 i've collected some authoritative publications on the subject, if you are interested in how it works. i have a vague understanding, but perhaps we can share our insights and learn a thing or two. i'm still figuring out the details.. http://bertolami.com/jerry/spectral.htm i’ve collected some authoritative publications on the subject, if you are interested in how it works. i have a vague understanding, but perhaps we can share our insights and learn a thing or two. i’m still figuring out the details..

http://bertolami.com/jerry/spectral.htm

]]> By: Nick http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1553 Nick Sat, 25 Mar 2006 01:54:36 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1553 Thanks Jerry, I'll keep that in mind. I'm working my way though that last document you recommended. :) Lots of good info in there. Also, I hear you on the math and wondering why it works. I've been looking at the perl code in that Dr. Dobbs article trying to figure out the advantages of that approach. Very interesting stuff. Thanks Jerry, I’ll keep that in mind. I’m working my way though that last document you recommended. :) Lots of good info in there.

Also, I hear you on the math and wondering why it works. I’ve been looking at the perl code in that Dr. Dobbs article trying to figure out the advantages of that approach. Very interesting stuff.

]]> By: jerry chen http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1552 jerry chen Wed, 22 Mar 2006 19:00:20 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1552 if you want, i can give you a whole slew of references. i'm currently using it for my thesis. the math isn't hard, but as to why it works is beyond me. if you want, i can give you a whole slew of references. i’m currently using it for my thesis. the math isn’t hard, but as to why it works is beyond me.

]]> By: Nick http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1551 Nick Tue, 21 Mar 2006 18:04:16 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1551 Hey Jerry, how's it going? Thanks for the link, I've come across the term "spectral clustering" while doing some reading, but this is the first paper I've seen that gives some good detail. Thanks! -Nick Hey Jerry, how’s it going?

Thanks for the link, I’ve come across the term “spectral clustering” while doing some reading, but this is the first paper I’ve seen that gives some good detail. Thanks!

-Nick

]]> By: jerry chen http://ironboundsoftware.com/blog/2006/02/27/phase-1-determine-what-problem-you-are-going-to-solve/comment-page-1/#comment-1550 jerry chen Tue, 21 Mar 2006 07:06:03 +0000 http://www.ironboundsoftware.com/blog/?p=197#comment-1550 hi, i think you may find this research paper relevant in what you're trying to do. whether you're building a portfolio of stocks across similar markets, detecting questionable accounting practices, or simply guaging company profitability, spectral clustering is a powerful tool useful for untangling high order correlational data into an embedding of manageable dimension. Porikli - Ambiguity Detection by Fusion and Conformity - A Spectral Clustering Approach http://www.merl.com/papers/docs/TR2005-035.pdf hi,
i think you may find this research paper relevant in what you’re trying to do. whether you’re building a portfolio of stocks across similar markets, detecting questionable accounting practices, or simply guaging company profitability, spectral clustering is a powerful tool useful for untangling high order correlational data into an embedding of manageable dimension.

Porikli – Ambiguity Detection by Fusion and Conformity – A Spectral Clustering Approach

http://www.merl.com/papers/docs/TR2005-035.pdf

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