Would You Take This Bet?
- Thread starter rmorse
- Start date
Nice video on risk aversion. Would be good to have one showing prospect theory...
Instinct tells me if there's 'free money' (or at least positive expected return) there is probably a catch (not a fair coin?).
But then despite my handle, I'm not into arbitrage....
Instinct tells me if there's 'free money' (or at least positive expected return) there is probably a catch (not a fair coin?).
But then despite my handle, I'm not into arbitrage....
yeah, but I'm pissed out didn't hold out for 2 to 1
Until half into the video the author is actually drawing a number factually incorrect assumptions. He basically summarizes that people are making bad decisions because they are afraid of loss. Until later he, however, has not mentioned that the bet can be repeated many times. So, generically saying it is a bad decision not to bet 10 for 12 or 20 is pretty imprecise. Why? Because peoples' utility is different. If I had 1 million and someone offered me a bet to put up 10 for 10.5 I would no question take the bet, even 10 for 10, because potentially losing 10 means nothing to me. I would take the bet just for the fun of it. On the other extreme if you offered someone living in a trailer park a bet to win 1 million usd in cash but he would have to surrender his home and become homeless if he lost, even if his entire net worth was worth only 50k such person for good reason would maybe not take the bet. So, peoples' utility was not considered at all. Furthermore, nobody asked nor was the information given (unless I missed it) whether the coin was a fair coin. Even if you repeated the experiment 100 times if I only had 30 or 40 dollars in the bank I would potentially not take the bet because even a small losing streak in the beginning may bankrupt me.
The core idea was communicated well but a number of important concepts and information was left out, intentionally or not. But I think it should belong in there because people are not as risk averse in all situations in life and there is good reason as I outlined above.
The core idea was communicated well but a number of important concepts and information was left out, intentionally or not. But I think it should belong in there because people are not as risk averse in all situations in life and there is good reason as I outlined above.
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Not to mention a random dude walks up to you on the street and offers you a even money bet. Would you really believe that it's not a scam or that it's not rigged?
And when he asked you if you wanted to do it at more favorable terms, would you have more confidence that it's a fair game?
And when he asked you why you wouldn't do it, would you likely make a random excuse or say "I think you are a cheating scumbag."
And when he asked you if you wanted to do it at more favorable terms, would you have more confidence that it's a fair game?
And when he asked you why you wouldn't do it, would you likely make a random excuse or say "I think you are a cheating scumbag."
shows you how unique traders are.