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 Post subject: Need some help with a math problemPosted: Wed Aug 22, 2012 6:33 pm

Joined: Mon Mar 30, 2009 5:13 pm
I've been struggling with this math problem and would be grateful for some help:

I have a function Q:

Q = m + r [(1-g) p^k - (1+g) (1-p)^k]

And its integral wrt p:

Int = m p + r/(k+1) [(1-g) p^(k+1) + (1+g) (1-p)^(k+1)]

I have found that as p approaches 0 or 1:

Int/p = Q/(k+1) + C

However, I can't seem to work out the constant C in terms of m, r, g and k.

Can somebody help me out, please?

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 2:19 am

Joined: Mon Mar 30, 2009 5:13 pm
OK, I managed to work out the constant by pure intuition, trial and error, but I have no idea why - I can't explain it:

As p approaches 0:

Int/p = Q/(k+1) + C, where:

C = k [m - r (1+g)] / (k+1)

I know it's right only because it gives exactly the right result for a variety of values m, r, g and k, but can anyone explain it, or work out a proof for this?

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 3:07 am

Joined: Mon Feb 27, 2012 10:57 am
Location: In my study drooling over my puzzle hoard - Precioussssss!
Is it allowed to use an iterative approach?

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 3:11 am

Joined: Mon Mar 30, 2009 5:13 pm
Is it allowed to use an iterative approach?

No, I used numerical methods to show that different combinations of values all fit, but I'm looking for algebraic proof, without substituting actual numbers into the variables, except what is stated, that p tends to zero.

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 3:42 am

Joined: Wed Jul 29, 2009 4:05 am
You have a slight problem, in that as written, Int/p diverges as p tends to 0. The terms in Int are mp (and it/p is constant), a multiple of p^{k+1} (which/p is small, assuming k is positive), and a multiple of (1-p)^{k+1}, but this final term is not small for small p, and so it/p will diverge.

However, if we assume that when you took the integral of Q wrt p, you were really doing a definite integral from 0 to p, then you need to subtract the lower limit, and Int should be

(your expression for Int) - (this evaluated at p = 0)

= (your expression for Int) - r(1+g)/(k+1)

And then it's fine. From here it's manipulation, and then a hint of binomial expansion.

We want C = Int/p - Q/(k+1) = [(k+1)Int - pQ]/p(k+1). So...

(k+1)Int - pQ

= (k+1)mp + r[(1-g)p^(k+1) + (1+g)(1-p)^(k+1)] - r(1+g) - mp - rp [(1-g) p^k - (1+g) (1-p)^k]

= kmp + r(1+g)(1-p)^k - r(1+g)

= kmp + r(1+g)[1 - kp + smaller terms] - r(1+g) -- (binomial expansion, where "smaller terms" means order p^2 or higher)

~ kp[m - r(1+g)] -- (ignoring those smaller terms)

So C = this/p(k+1) = the value you claim.

Last edited by drswirly on Thu Aug 23, 2012 3:58 am, edited 1 time in total.

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 3:58 am

Joined: Mon Mar 30, 2009 5:13 pm
Brilliant, well spotted, and thank you!

Now, by the same approach, what is the constant as p approaches 1?

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:02 am

Joined: Wed Jul 29, 2009 4:05 am
Assuming that everything else is the same, e.g. that we're still integrating from 0 to p (rather than from p to 1), then the expression

(k+1)Int - pQ = kmp + r(1+g)(1-p)^k - r(1+g)

still holds (because the assumption about p going to 0 wasn't used until later).

And here we can just substitute in p = 1, to get

km - r(1+g)

and hence

C = [km - r(1+g)]/(k+1)

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:09 am

Joined: Mon Mar 30, 2009 5:13 pm
Sorry, in that case we should be integrating from p to 1...

BTW, as you've helped me so much I should tell you that Q is a four-parameter probability distribution, and this result can help to calculate the average tail value above or below a certain threshold value Q. These are the so-called "black swans" of risk - extreme outliers with very big impact but low probability.

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:32 am

Joined: Wed Jul 29, 2009 4:05 am
KelvinS wrote:
Sorry, in that case we should be integrating from p to 1...

Only this time, presumably you would want

Int/(1-p) = Q/(k+1) + C

? If so, then the answer for C is the same, I think. Either by similar manipulation (only a hint less nice, as we're in terms of (1-p) this time), or by waving our hands and using a symmetry argument.

Quote:
BTW, as you've helped me so much I should tell you that Q is a four-parameter probability distribution

Oh, it was clearly probability, but I was trying to avoid thinking about that because probability never made any sense to me!

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:52 am

Joined: Mon Mar 30, 2009 5:13 pm
Yes, that's right, many thanks.

I love working on risk so probability distributions are a critical part of that, however I've had to devise this "synthetic" probability distribution to capture skewness (g) and kurtosis (k), which we tend to ignore at our peril. Anyway, this has been very helpful so thanks again.

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

Last edited by KelvinS on Thu Aug 23, 2012 4:55 am, edited 1 time in total.

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:55 am

Joined: Wed Jul 29, 2009 4:05 am
Oops! Not quite the same. I forgot that we had (1-g) on one term and (1+g) on the other. So there is a slight change, and the second C (assuming Int/(1-p) on the LHS) will be

C = k[m + r(1-g)]/(k+1)

A '+' in the middle (because of working at the other end of the interval), and a '-' in the bracket because the p^k term dominates.

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 4:58 am

Joined: Mon Mar 30, 2009 5:13 pm
Thanks, you might just have avoided the next financial crash.

Or actually since we're now talking about extreme upside outliers, you may have just helped to avoid the next financial boom!

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If you want something you’ve never had, you’ve got to do something you’ve never done - Thomas Jefferson

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 Post subject: Re: Need some help with a math problemPosted: Thu Aug 23, 2012 1:14 pm

Joined: Sun Mar 15, 2009 12:00 am
Location: Jarrow, England
This should be be discussed on the TP forums It should have been kept to pm only. Everyone knows that the official language of TwistyPuzzles is English, and you two are speaking fluent gibberish

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