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What does the capital market and a hand of baccarat have in common?

October 3rd, 2011 by dimpledbrain

I’ll let you take three guesses before I give you the ultimatum. Well, any of your three guesses will not be correct because I don’t know what’s the connection too but does my fascination with both count? Haha, lame joke I know. But couldn’t help it really.

The term apophenia (pronounced as ef.ə.′si.niə) is defined as the experience of seeing meaningful patterns or connections in random or meaningless data. This combined with hindsight bias will be really freaky to the extent that either Shutter or Final Destination 5 has to step aside.

The most extreme case that I’ve heard of is a tribe in Africa that worships the sun fearing the day they stop doing so is the day the world will come to an end. This practice continues to this day. We may find the story hilarious or outright stupid simply because we know what a sun is and more importantly of the zero correlation between the two. However if we don’t and somehow got into the circular reasoning mode (click here or here), we’ll find it absurd only to the extent why the rest of the world isn’t worshipping along us.

That’s what a game of baccarat could teach us besides being my favourite game in casino. If you’ve been to any casinos in the world, just observe how everyone would stare fixedly onto the historical board trying to predict the next winner. (Baccarat is a card comparing game played between two hands, the “player” and the “banker”. Each baccarat coup has three possible outcomes: “player” (player has the higher score), “banker”, and “tie”)

Statistically speaking, we know that the previous hand has got no bearing whatsoever on the next although it’s also proven that the banker would have a slight edge over the player (in the long run) but otherwise negligible. And betting on “tie” is a total waste of time and a demonstration of sheer ignorance. Try telling that to the ‘ah mah’ (auntie) who is betting next to you and be prepared to get whacked left right and centre.

Surely after three rounds of ‘player wins’ the next winner must be ‘banker’. Look at the past records, idiot.

But we know crudely speaking it’s 50-50 ignoring tie games where you won’t get penalized anyway. Whatever we do, staring at the board, flipping a coin or holding hands and jumping in circle will not change the fact that baccarat is merely a game of chance, nothing more or less than just that.

So why do we stare at the board?

Why do we believe today is my bad luck day?

And what’s wrong with this statement – if you bought one thousand shares of Public Bank Berhad (a listed company on Bursa Malaysia) from its initial public offering and held through till today, it’s worth like RM1m each now. The listing price back then could be around RM2,000 (i.e. RM2 * 1,000 shares).

Anyone up for a wild guess?

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