I asked this question a while back (Why is trading in the stock market 50% probability instead of 25% probability?) and the answer that was given to me is:
(1/2 * 1/2) + (1/2 * 1/2) = 1/4 + 1/4 = 2/4 = 1/2 = 50% chance
I've thought about it some more and I realised that I don't really understand the calculation as I thought I did.
My thought process:
(1/2 * 1/2) -> why multiplication? There are two independent events (buy or short-sell and win or loss). The first "coin toss" = 50% and then a second toss results also in 50%. Wouldn't that be 1/2 + 1/2 = 1 (which is incorrect)? I thought that multiplication means 1 single event (that is, two "coin tosses" at the same time)?
And then the addition part... if it's adding, then that means I'm adding two independent events, right? So that really means the first "coin toss" is (1/2 * 1/2) and the second toss is (1/2 * 1/2). Did I at least understand the addition part?
I was hoping someone could walk me through the calculation... sort of /explainlikeimfive. I really would like to understand it!
Multiplication means "you need the situation both to be true".
For example, if I do not want to get wet in rains, there are two cases
Assume all things have probability assigned (and those probabilities are independent). Then I will say the whole probability of me not getting wet is
The addition means "two separate cases", and multiplication means "I need both to be true in order to be safe".
So yup, for the stock market, "1/2 $\times$ 1/2" definitely means that you need both cases to happen in order to earn money, so on and so forth.