Crystal Ball Challenge: Knowing the Future Isn't Enough to Guarantee Riches
2024-12-15
Elm Partners conducted an experiment called the "Crystal Ball Challenge," where 118 finance students traded stocks and bonds using the Wall Street Journal's front page from one day in the future (with price data blacked out) over 15 days. The results were surprising: despite having future information, most participants didn't profit, averaging a mere 3.2% gain. Experienced traders, however, performed exceptionally well, averaging a 130% gain. The experiment demonstrated that even with 'future' knowledge, successful investing requires sensible position sizing. This research highlights the importance of decision-making under uncertainty and position sizing, offering valuable lessons for financial education.