Lambdia

Bayes theorem

5 articles

Twenty Traders, One of Them Informed, and the Nickel That Empties the Book

If any order is equally likely to come from any of twenty traders, a buy order puts the posterior at 21/40 and forces an honest ask five cents above a mid of zero, so the spread is 2/N whatever the crowd's size. Each of the nineteen uninformed traders then loses exactly five cents a trade, which sums to the insider's 95 cents because (N-1)/N and 1 - 1/N are the same number. Volume falling is a comparative static on top of that spread rather than a theorem of the model, and naming the insider would have repaired the market instead of breaking it, since a known informed trader can simply be refused.

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A Hundred Heads in a Row: the Answer Is Not One Half

Coins have no memory, which is true, and nobody said this coin is fair, which is the whole problem. A fair coin explains the run with probability two to the minus one hundred while a two-headed coin explains it every time. The article locates the threshold exactly and reconciles the answer with the companion piece on ten heads, which asks a different question about a different setup.

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