Shannon's demon refers to a thought experiment proposed by mathematician and engineer Claude Shannon. It aims to illustrate how information and entropy (a measure of randomness or disorder) are related. In simple terms, imagine you have a box filled with a collection of particles, like air molecules. Each particle has its own unique position and speed, making the system appear random or disordered. Now, imagine a hypothetical "demon" that has complete knowledge of the exact position and speed of every particle in the box. The demon, armed with this precise information, can selectively manipulate the particles to lower their entropy and create a more ordered state. For example, it can make all the slower particles gather in one corner of the box, while the faster particles cluster in another corner. This situation seems to defy the second law of thermodynamics, which states that the entropy of an isolated system tends to increase over time. However, Shannon's demon does not actually violate this law. The demon itself requires energy and information to perform its manipulations, and the overall entropy of the system (including the demon) still increases. The key insight from Shannon's demon is that information can be used to reduce entropy locally, but at the expense of increasing entropy elsewhere. It highlights the connection between information, entropy, and energy in physical systems, and has implications in various fields such as information theory and thermodynamics. ## Favorable Coin Flipping Game >In a study, each participant was given $25 and asked to place even-money bets on a coin that would land heads 60% of the time. Participants had 30 minutes to play, so could place about 300 bets, and the prizes were capped at $250. But the behavior of the test subjects was far from optimal: > >Remarkably, 28% of the participants went bust, and the average payout was just $91. Only 21% of the participants reached the maximum. 18 of the 61 participants bet everything on one toss, while two-thirds gambled on tails at some stage in the experiment. >-[Wikipedia](https://en.m.wikipedia.org/wiki/Kelly_criterion) **Case Studies** - [CHG Issue #80: Central Banking](https://cedarshillgroup.substack.com/p/issue-80-central-banking) - [CHG Issue #82: Shortening the Feedback Loop](https://cedarshillgroup.substack.com/p/issue-82) - [CHG Issue #112: Anatomy of a CMBS Downturn](https://cedarshillgroup.substack.com/p/chg-issue-112-anatomy-of-a-cmbs-downturn) - [CHG Issue #113: Counterfactuals](https://cedarshillgroup.substack.com/p/chg-issue-113-counterfactuals) Explore Further: [[Risk]] | [[Availability Bias]] Tags: #seeds Your support for Cedars Hill Group is greatly appreciated <form action="https://www.paypal.com/donate" method="post" target="_top"> <input type="hidden" name="hosted_button_id" value="74PGN8ZXHQVHS" /> <input type="image" src="https://www.paypalobjects.com/en_US/i/btn/btn_donate_LG.gif" border="0" name="submit" title="PayPal - The safer, easier way to pay online!" alt="Donate with PayPal button" /> <img alt="" border="0" src="https://www.paypal.com/en_US/i/scr/pixel.gif" width="1" height="1" /> </form>