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Switching Between Two Losing Stocks May Enable Paradoxical Win: An Empirical Analysis

Author

Listed:
  • TAO WEN

    (Science, Mathematics and Technology Cluster, Singapore University of Technology and Design, S487372, Singapore)

  • JOEL WEIJIA LAI

    (Science, Mathematics and Technology Cluster, Singapore University of Technology and Design, S487372, Singapore)

  • KANG HAO CHEONG

    (Science, Mathematics and Technology Cluster, Singapore University of Technology and Design, S487372, Singapore)

Abstract

Finding strategies to profit from the stock markets is a topic of immense interest to both institutional and retail investors. Possible methods range from machine learning, time series prediction, and network science to game theory. Game theory is a useful mathematical tool to model the relationship between agents and the stocks. In this paper, we ask an important question: Why do some (non-optimal) traders end up winning despite alternating between losing stocks? Our empirical observations reveal that by using a switching strategy abstractly derived from the switching in Parrondo’s paradox, we can demonstrate that losing stocks can be combined in a time-based switching scheme to achieve a winning outcome. This is akin to an automatic investment plan. Several stocks within a given time period are being analyzed. Our analysis may provide a descriptive explanation for why some traders end up winning despite switching between losing stocks. However, it is not the focus of this paper to provide any normative advice or support for switching between stocks.

Suggested Citation

  • Tao Wen & Joel Weijia Lai & Kang Hao Cheong, 2023. "Switching Between Two Losing Stocks May Enable Paradoxical Win: An Empirical Analysis," FRACTALS (fractals), World Scientific Publishing Co. Pte. Ltd., vol. 31(10), pages 1-15.
    • Handle: RePEc:wsi:fracta:v:31:y:2023:i:10:n:s0218348x23400017
    DOI: 10.1142/S0218348X23400017
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