If you’ve ever wanted to use bayesian methods (like I did) to analyze financial outcomes, I encourage you to check out a free primer from Stanford University titled “Bayesian Finance.
Bayesian methods are a way of figuring out how much of a certain thing is a function of other things. For example, if you wanted to figure out how much of a stock was a function of how much a company’s stock was trading, Bayesian methods are the way to do it. They are based on the idea that the model is a set of variables that are all independent of each other.
Bayesian methods are basically a way to find a probability that a certain event has happened. If you like, you could call them “Bayes’ Theorem”, or “the law of large numbers”. Bayesian methods work best when the number of variables is large and the number of possible outcomes is small.
With bayesian methods, we are able to use the fact that each of the variables in a system are independent of each other. This means that Bayesian methods don’t need to use probability theory. They just use how many possible outcomes there are, or the size of the system. We can just calculate the probability that a system will happen given certain conditions and then compare it to the other probability that the system might have happened.
Bayesian methods are good for making the decision whether to invest in a stock or not. But they are also good for risk management. A small change in a financial factor could lead to a huge change in the probability that the system will happen or the amount of risk.
Financial markets are complex and Bayesian analyses can be very useful in making those decisions. In our case we use them to make decisions about the probability of buying and selling stocks. And because it’s based on the concept of probability, it makes it very easy to compare and contrast the outcomes. If the probability that the stock will go up is higher than the probability that it will go down, we’re more likely to sell the stock.
When stock prices fluctuate, they are usually driven by news or events, which can be reflected in the market. For instance, if you buy and sell a stock that’s going down, it’s because news reports that the company is in trouble. But if the stock is going up, it’s because of positive news.
One of the most basic problems in financial analysis is that it’s often impossible to separate out the effects of news from the effects of other things which are correlated with news. For instance, if people are worried that the stock is going to go down, the market will tend to do that. But if the news is that you’re going to get a raise, there will be a lot more people who sell the stock because they assume you’ll get that raise.
In terms of market manipulation, there are various ways of making people feel bad about themselves, especially when the news is negative. For instance, when you’re going to sell a stock, you’ll feel bad about yourself, so it will make it harder for you to sell it. But when it’s negative news, a lot more people will feel bad about themselves because you’re selling the stock.
