All of Russ_Andersson's Comments + Replies

That was the point of the coin flip example. It was to point out that the market is not random even if it appears to be about as random as a coin flip. Information from the previous flip factors into the next flip, reducing the likelihood that any given trend will continue. What I think you are missing is the fact that everybody knows that the way to take advantage of an inflated price is to sell short - it is not a unique insight on your part. Since it's common knowledge, obviously everybody knows that everybody else knows that the way to exploit this situation is to sell short. Therefore there is a very high probability that a significant portion of the market will bet on tails to capture the edge. This destroys your likelihood of successfully beating the edge, because too many people are going to attempt the same thing you are. Those who recognize this (and there are many) also know that the next level of exploitation is to bet on heads. The end result is a wash - there is a 50/50 chance that the 11'th flip will be heads, not a 10/11 chance like traditional probability suggests, because everybody is trying to out-exploit everybody else. The market is anti-inductive. Think of poker. Someone who knows the probabilities of poker hands can win in far more situations than someone who does not. They will know when to bet and when to fold, maximizing their success. However, when playing with players who know the probabilities of poker hands this strategy becomes much less successful. Because everyone is only playing cards they can win with, it is only the really lucky players who get more good cards than bad who come out ahead. However, by exploiting the likelihood of given cards, they can pretend they have cards they do not have and convince the rest of the players to give up. This makes their probability of winning skyrocket, and the net result is that the best hand winds far less often than probability suggests. This is the result of everybody knowing how to expl