Statistics 701: Ponzironi

Announcement

• HW2 due next thursday
• Notes: .ps, .pdf. I'll probably be updating these notes over the next few days. But the first 10 pages won't change very much.

Ponzironi

• What is a Ponzi scheme?
  • Sometimes called pyramid schemes, multi-level marketing schemes, airplane schemes, sometimes called simply mail-fraud
  • Start with 100 investors. All give 100 dollars.
  • Each month find 10 new investors to each give 100 dollars.
  • Pay this new money to the existing investors
  • Keep finding new investors each month.
  • Once you can't find anyone else new the scheme is said to crash

• Our goal: fake a Ponzi scheme (legally?)

• First story: Mathnet
  • send out 64 emails: 32 forcasting market up 32 forcasting market down
  • send out 32 emails to those who we got right in first rund: 16 up 16 down
  • send out 16 emails: 8 up 8 down
  • send out 8 emails: 4 up 3 down
  • send out 4 emails: 2 up 2 down
  • send out 2 emails: 1 up 1 down
  • Now send out email asking for money for next forecast

• Second story: starting many Hedge funds
  • Start 64 hedge funds: 32 leverage market up, 32 leverage market fall
  • Fold losing 32
  • Of 32 winners: 16 leverage market up, 16 leverage market fall
  • Fold losing 16
  • ...
  • Last 6 month track record: doubling every month
  • Show track record to very rich person--ask for one million dollar investment

• Third story: Search through database
  • Start with 64 rules for picking a stock (think leveraged)
  • Each month or two kill off the bottom 1/2 of the rules
  • After a year or so, you have one rule that has grown spictularilly

• How big might the t-statistic be following such a scheme?
  • Suppose you do n different tests
  • Bonferonni p-value = n * regular p-value
  • If JMP won't do it for you, use sqrt(2 log(n)) for significance
  • If you require Bonferonni significance, you will rarely fall into the trap of 3rd story.

Last modified: Tue Oct 7 08:55:15 EDT 2003