Understanding Probability

[OddTrader]

How about this quest: (I will later provide the source for you to find answer.)

" In a recent survey, I asked participants the following questions:
Investor A invested 60% in equities and 1% in tail hedges.
Investor B invested 50% in equities and nothing in tail hedges.
The equity market rallied 10%.
Investor A's tail hedges expired at 0 value.

Who was happier?
1. Investor A.
2. Investor B.
3. No difference.

Remark: The question asks who was happier, not who was correct.
"

 

[Tavurth]

Investor A:
Lived his life, as per his norm. Saw his children play, watched his wife cook, sat in the sunshine.

Investor B:
Glued to the market 25/7, ensuring his excess risk stayed within boundaries. Finally upon being right; Ego expansion.

Investor A experienced life, Investor B experienced winning, who am I to say who is happier?

 

[loyek590]

Investor A:
Lived his life, as per his norm. Saw his children play, watched his wife cook, sat in the sunshine.

Investor B:
Glued to the market 25/7 making sure that his excess risk stayed within boundaries. Finally his ego expanded upon being right.

Investor A experienced life, Investor B experienced winning, who am I to say who is happier?

well, then you also have to ask, "Who ended up more unhappy?"

when investor A lost, he lost lost his wife and family

when investor B lost, all he lost was money

 

[Tavurth]

well, then you also have to ask, "Who ended up more unhappy?"
when investor A lost, he lost lost his wife and family
when investor B lost, all he lost was money

Both tail end events. The bonds of a gambler to his cash are but a thread to the biological urge of family, and security.

 

[OddTrader]

Survey results based on 250+ respondents: (page 157 of Tail Risk Hedging by Bhansali))

Who was happier?
1. Investor A. - 50%
2. Investor B. - 30%
3. No difference. - 20%

 

[loyek590]

I'm confused. Are we talking about probability or tail risk?

 

[Tavurth]

I'm confused. Are we talking about probability or tail risk?

I'd judge the probability of Investor A losing his family {Event A}, to be much lower than unhedged Investor B loosing his money {Event B}.

Both events would be considered tail risk, as they're something unexpected. Probability of the outcome, differs greatly between the two.

 

[OddTrader]

I'm confused. Are we talking about probability or tail risk?

My guess is if we include also tail risk, we would cover the whole spectrum of probability events.

Sometimes odds could be more useful than probabilities.

http://www.elitetrader.com/et/index...of-betting-odds-vs-probability-vs-rrr.288574/

http://www.elitetrader.com/et/index.php?threads/odds-and-probability.9307/

 

[loyek590]

I'd judge the probability of Investor A losing his family {Event A}, to be much lower than unhedged Investor B loosing his money {Event B}.

Both events would be considered tail risk, as they're something unexpected. Probability of the outcome, differs greatly between the two.

the only way to know for sure would be to get the past data on how many wives divorced their husbands because of gambling and how many men actually blew up

and then, it is only past data

who know's? Maybe in the future women like gamblers

 

[Tavurth]

Insurance premiums will also change depending on the past payouts. In the chart below, we can see the compensation paid for crops in different counties.

The future premiums (Cost per probability of loss), will be calculated based upon this data.