Starting with a fully invested A-share portfolio to become a capital...

Chapter 90 On the Way (Part 2)

"Many of you may have heard that some people abroad have used mathematics to predict the lottery and made a fortune. What would happen if we used mathematics to open up the A-share market?"

Peng Ge turned on the teaching projector, and a chart showing the trend of 120 trading days was clearly displayed in front of everyone.

"This is a chart of the Shanghai Composite Index over 120 trading days. It rose for 74 days and fell for 46 days, so the probability of rising is 61.7%. Assuming we are still in this upward cycle, and without considering other factors, the probability of rising on the next trading day is 61.7%. Doesn't everyone think investing has become very simple?"

"But that's wrong. To be precise, the capital market is not a simple probability problem, but a mathematical problem of game between retail investors and institutional investors. I call it game variables."

Peng Ge clicked the mouse to switch to the next page of the speech.

On the projection screen, an image of a man and a woman appeared, with four Chinese banknotes in the blank space below them.

"Next, I will use an example to illustrate the variables in game theory."

He paused for half a second to gather his thoughts and said, "As shown in the picture, a woman asks a man to play a coin game. Each of them holds a coin. If both coins are heads, the woman gives the man three yuan. If both are tails, the woman gives the man one yuan. If one coin is heads and the other is tails, the man gives the woman two yuan."

"If we apply probability theory, the probability of both people getting heads is one in four, the probability of both getting tails is also one in four, and the probability of getting one head and one tail is one in half."

“套入计算公式E=1/4×3+1/4×1+1/2×(-2)=0，也就是说，男人玩这场硬币游戏的平均回报等于0。”

“Here comes the point.”

Peng Ge raised his voice and continued, "This game is not simply a matter of probability, but rather a matter of men and women choosing which side of a coin to roll. Obviously, neither of them can keep rolling heads or tails, because they both want to get money out of the other's pocket. That's the variable in the game."

"Applying the above example to the stock market, stocks cannot rise every day. Retail investors and institutional investors are two players who compete against each other."

"If we were the market maker, how could we consistently profit from retail investors?"

As he posed the question, Peng Ge scanned the students present. Those whose eyes met his lowered their heads, not daring to look directly at him.

Even the exchange students from the Central University of Finance and Economics lowered their heads silently. They had never encountered what their dean of finance was talking about before and were still trying to figure it out.

In the field of financial mathematics, this is a smooth path to becoming an academician.

After a moment of contemplation, He Jing, sitting in the third row, calmly replied, "Using the coin game example from earlier, if the woman is the dealer, she will control the frequency of heads. If both sides get heads, the woman will lose three yuan, while if both sides get tails, the woman will only lose one yuan. Reducing the frequency of heads reduces the probability of losing money."

"Yes."

Peng Ge gave He Jing an approving look and dissected the coin toss game, saying, "This coin toss game seems fair, but it is not. Women can cut their losses by throwing tails, but men do not have the option to cut their losses. If they want to maximize their gains, they should throw heads as much as possible. By playing the variables, they can easily grasp the psychology of retail investors."

"Some might say, 'Can't men just make a profit by adjusting the opposite side?'"

"When people enter the stock market, who doesn't have the greedy mentality of getting rich quick? The more greedy you are, the greater the chance of getting a positive outcome. This is why the stock market is called counterintuitive."

"Clap clap-"

The classroom erupted in applause.

While applauding, Zhang Yang also had to admit that Peng Ge was right.

"I'll give you three minutes to think about how to help retail investors profit."

Upon hearing this, Li Xueyan, an exchange student from Peking University, couldn't wait to reply: "Set stop-loss and add-on lines, strictly abide by discipline, and put knowledge into practice."

Are there any other answers?

Peng Ge seemed dissatisfied with this answer.

"Make good use of technical indicators, such as support levels, KDJ and MACD, and apply Fibonacci retracement support lines."

"It's getting close."

“Collect stock market data and analyze it using mathematical models, such as the ARIMA autoregressive integral moving average model and the GARCH generalized autoregressive conditional heteroscedasticity model.”

“Good, please elaborate.”

Peng Ge also recognized that the person who mentioned the mathematical model was his own student from the Central University of Finance and Economics, and he also wanted him to show off in front of everyone.

However, the man hesitated and kept avoiding eye contact.

Clearly, he only knew one side of the story. The complexity inherent in financial mathematics is beyond the grasp of ordinary investment students, especially since it is not a major course.

"Ugh!"

Peng Ge sighed inwardly. Just as he was about to reveal the answer, a young, magnetic male voice came from the left. "Academician Peng mentioned game variables earlier, or more accurately, Nash equilibrium. I believe that if retail investors want to profit, they must first understand the market, and only then should they engage in game theory."

"Ok?"

Peng Ge's gaze drew everyone's attention to the source of the sound.

When Bao Xingwei saw that it was Zhang Yang, he was surprised and thought, "Is this kid so knowledgeable? He even knows the concept of Nash equilibrium in game theory."

"Please elaborate."

Peng Ge sized up Zhang Yang.

Their visit to Shanghai Finance was motivated by amazement at He Jing's 57.4% return and a desire to know whether the circulating market research reports were indeed written by Zhang Yang.

To put it bluntly, they believe that Bao Xingwei's involvement in "leaking" exam questions allowed Shanghai University of Finance and Economics to completely outperform other universities this year.

When Zhang Yang entered the classroom in the morning, the gazes of many deans and professors made him vaguely realize that something was wrong.

During his lunch break, he made a special call to Wang Xingbang and learned some of the hidden details.

Since the other party's intentions are hostile, the best way to respond is to engage in direct and constructive dialogue.

"Regarding market perception, I would like to use the coin game that Academician Peng just mentioned as an example."

Zhang Yang took a deep breath, organized his thoughts, and said: "Assuming the man's face is X and his face is 1-X, and the woman's face is Y and her face is 1-Y, the man's payout matrix is ​​XY payout 3 yuan, (1-X)Y payout -2 yuan, X(1-Y) payout -2 yuan, and (1-X)(1-Y) payout 1 yuan."

"For men to win money, they need to adjust X to make their return rate greater than 0, while women need to adjust Y to make men's return rate less than 0, which means they lose money."

"According to my calculations, as long as the woman maintains a frequency of Y at 3/8, no matter what strategy the man uses, he will lose an average of 1/8 of the rounds."

"To put it simply, the combination (1-X)(1-Y) with a profit of 1 yuan is a trap set by the woman. The profit of 1 yuan is not enough to offset the frequency of loss of 2 yuan. The man seems to have a 50% chance of winning money, but in reality, the win rate is infinitely close to zero."

"call--"

He let out a long sigh and emphasized, "In other words, this game was unfair from the very beginning."

Zhang Yang spoke each word with force and conviction, drawing everyone's attention to this recognized academic star in investment studies at Shanghai University of Finance and Economics.

Before anyone else could react, he looked directly at Peng Ge on the podium and continued:

"Returning to the perspective of market cognition, I believe that if retail investors want to profit from capital, they must understand what kind of game they are playing. Only by understanding the underlying rules can they find their own XY profit model."

As the words fell, a crisp round of applause rang out in the quiet lecture hall; it was Peng Ge clapping alone on the podium.

"Snapped--"

"Clap--"

"Clap clap-"

A series of applause erupted, echoing throughout the lecture hall.

As Xu Zhiruo clapped, she didn't forget to look at He Jing and Lan Sisi and exclaimed, "Although I don't understand what he said, he truly deserves to be the man Ruoruo has her eye on. He spoke so well!"

"I've got my eye on it too."

Lan Sisi said half-jokingly.

Wei Yunshi: "Me too."

"That's really impressive." He Jing suddenly felt that she and Zhang Yang were on different levels, and there was so much she still had to learn.

Standing outside the classroom, Xu Zhirou, who was also observing the proceedings, was surprised. She seemed to understand why Xu Zhiruo was such a fervent fan; she did indeed have a certain charm.

The deans of Southwestern University of Finance and Economics, Shu Tianyi, who was sitting in the first row, Zhao Yanfeng, who was the dean of the Department of Finance at Tsinghua University, and the deans of other universities such as Beijing University, Fudan University, and Shanghai Jiao Tong University all dispelled any suspicions that Shanghai University of Finance and Economics had cheated.

Meanwhile, in the large group chat for investment students at Shanghai University of Finance and Economics, messages from junior students were flooding in.

[Lin Yichi]: Oh my god, is this the legendary senior Zhang Yang?
[Wang Qiao]: I didn't understand a word of XYXY or XXYY. I felt a sense of powerlessness as knowledge slid through my brain. But Senior Zhang Yang is really handsome. I want to get this man!
[Li Qiqi]: If Senior Zhang Yang confesses to me on May 520th, I'd be willing to drive a luxury car and live in a big villa!

[Chen Jiaxiao]: Strategy, macroeconomics, mathematics, cognition... Oh my god, after listening to the lecture, I feel like I'm all good again. The A-shares market is going to suffer a lot next week. Even Jesus couldn't stop me!
Thank you so much for the 5000-point reward from the "Golden List Nomination" expert, thank you for the 500-point reward from the "Egg's Melancholy" expert, and thank you for the 100-point rewards from readers 1609…5646, 2025…4942, and "Salted Fish Turns into Lucky Koi". Thank you all very much. Also, thank you to all the readers who gifted monthly tickets, recommendation tickets, and read the book daily.

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(End of this chapter)