Many things on this planet seem random, such as the heights of humans, the length of leaves, the roll of 3 dice, and the change of stock market prices. But when academics, statisticians and mathematicians view the world, they see patterns that others do not notice. The device shown above on the left was first created by Francis Galton in about 1890 and today has many names; Probability Pinball, Galton Board, Quincunx Board, and Bean Machine. The Galton Board simulates random events and how the distribution of a large number of them tend to form what looks like a bell shaped curve. The beads falling through the pins are not predictable as to which course they will take, but the average outcome of a large number of such beads, just like 780 monthly returns of Index Portfolio 60, form a relatively predicatable pattern that, in 1794, Johann Carl Friedrich Gauss referred to as a "normal distribution." The more often an event occurs, the more a pattern emerges such as seen in the histogram of monthly returns for Index Portfolio 60. The beads randomly falling into different channels or the monthly index price changes that are created due to investor's reactions to random news about capitalism in that period, show essentially the same distribution. |