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3 Doors

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Submitted By dawlboult
Words 274
Pages 2
Imagine you are on the stage of a television game show and the host asks you to choose among three doors. There is a new car behind one of the doors, which will be your prize if you guess right. You choose the first door. Then the host opens the third door to reveal that the car is not there. Then he asks you if you want to change your guess. Should you now choose the second door, or stay with your choice of the first door, or does it matter?

Why it doesn’t matter: The car is behind door one or door two. You have already chosen door one so you have a 50/50 chance of winning. There is no reason to change your choice.

Why it does matter: The odds of winning the car started as one in three. How can the host opening door three change those past odds? Now you know the car is behind door one or door two. But the odds of the car being behind door one are still one in three while the odds of the car being behind door two are 50/50.

Perhaps another scenario may cast some light. Suppose the host opened door one and revealed that your guess was wrong. Then he asked if you wanted to change your guess. Would you? Of course you would.

So what does this have to do with the price of rice? Nothing. But it shows that information matters, and it matters for investment decisions. New information may require new action, such as rebalancing a portfolio or updating an econometric model or a forecast.

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