5 ms·

It's actually a very good analogy. > If you can get higher expected returns with an increase in risk That's not how risk works. You always get higher expected

by maratd 10y ago

It's actually a very good analogy. > If you can get higher expected returns with an increase in risk That's not how risk works. You always get higher expected returns with higher risk. That's the point or people wouldn't even consider it. You also get a higher probability of losing everything. > as long as you can spread the risk around multiple fields. Diversification is a strategy for reducing risk. It's irrelevant to this discussion. High risk as a strategy is sound when you have little to lose. Like when you're young and poor. When you're old and wealthy, it is profoundly stupid regardless of what strategy you employ. It is exactly like being in a casino. You have a ton of cash in your pocket, why would you engage in investments where the probability of losing your shirt is high?

Dylan16807 10y ago
> That's not how risk works. You always get higher expected returns with higher risk. You make investment choices sound like a law of nature. There are risky bets without high returns, and they have a hard time attracting investors. > Diversification is a strategy for reducing risk. It's irrelevant to this discussion. The more money you have to spare, the more you can diversify. Having more money means risky bets are less risky to you. > High risk as a strategy is sound when you have little to lose. Like when you're young and poor. When you're old and wealthy, it is profoundly stupid regardless of what strategy you employ. This isn't about age. If we talk about 38 and poor vs. 38 and wealthy, I strongly disagree with your argument. Risky betting with half your money when you're poor could make you go hungry for a week. Risky betting with half your money when you have a moderate amount could ruin your ability to have a carefree retirement. Risky betting with half your money when you're wealthy will barely impact your standard of living. > It is exactly like being in a casino. But it's not a good analogy unless there is an analogue to the poor person that you say should be engaging in risky investments. Are you saying a poor person should bet their money in a casino? > the probability of losing your shirt Oh, there's a bit of a disconnect. The rich person should not be betting all of their money. The reason it's easy for them to invest is that they can spare a big fraction of their money and even if it catches fire they won't lose their shirt. - I can put it an entirely different way. When you don't have enough money to be comfortable, the happiness/dollar graph is closer to linear. Once you have more money than that, it's closer to a log graph. Someone in the first group has a lot more negative consequences from losing half their money. They should go with somewhat-safe bets and the moderate gains will help them a lot. Someone in the second group isn't impacted much if they lose half their money. But they need huge returns if they really want to improve their state of life. They are a much better fit to the risky high-value investment.
- maratd 10y ago
  > The reason it's easy for them to invest is that they can spare a big fraction of their money and even if it catches fire they won't lose their shirt. Let's do an experiment! Take $2K out of your savings account. Put $1K in one pocket and $1K in the other pocket. Your left pocket is your safety net and your right pocket is your "get rich" fund. Now go to a casino. Play a little. After that, let me know what you think about rich people "investing" their money, my analogy, and how they should really do it.
  - Dylan16807 10y ago
    I don't understand where you're going with this at all. The decision-making I outlined depends on net worth, and you didn't specify whether I'm rich or poor. The decision-making I outlined says to never try to make money at a casino, because the expected returns are negative. But if I assume I'm rich, and I spend my $1K at the casino... well I probably have some alcohol and have fun, so great? I still have tons of money left?? I'm really not sure what this is supposed to demonstrate. If I'm poor then I lose it all and I'm sad because I needed that money. The very fact that you call it a "get rich" fund is totally against my argument. I said you should not use risky bets to try to get rich. Only risk your money if you can spare the money. (And only risk your money on things with high expected returns, duh.)
    - maratd 10y ago
      > I don't understand where you're going with this at all. Because you've never been to a casino. Because you've never gambled and won. Because you don't understand human nature. Because you're trying to rationalize your way to the answer through logic, but people don't invest or live that way. If you try what I asked you to do, you'll understand. You'll also understand why those who are wealthy invest the way they do and why I said what I did. I'll repeat what I said. It makes perfect sense for those who are wealthy to invest conservatively. If you find yourself with lots of money at the casino, the best course of action is to leave.
      - 10y ago

by maratd 10y ago

Dylan16807 10y ago

> That's not how risk works. You always get higher expected returns with higher risk. You make investment choices sound like a law of nature. There are risky bets without high returns, and they have a hard time attracting investors. > Diversification is a strategy for reducing risk. It's irrelevant to this discussion. The more money you have to spare, the more you can diversify. Having more money means risky bets are less risky to you. > High risk as a strategy is sound when you have little to lose. Like when you're young and poor. When you're old and wealthy, it is profoundly stupid regardless of what strategy you employ. This isn't about age. If we talk about 38 and poor vs. 38 and wealthy, I strongly disagree with your argument. Risky betting with half your money when you're poor could make you go hungry for a week. Risky betting with half your money when you have a moderate amount could ruin your ability to have a carefree retirement. Risky betting with half your money when you're wealthy will barely impact your standard of living. > It is exactly like being in a casino. But it's not a good analogy unless there is an analogue to the poor person that you say should be engaging in risky investments. Are you saying a poor person should bet their money in a casino? > the probability of losing your shirt Oh, there's a bit of a disconnect. The rich person should not be betting all of their money. The reason it's easy for them to invest is that they can spare a big fraction of their money and even if it catches fire they won't lose their shirt. - I can put it an entirely different way. When you don't have enough money to be comfortable, the happiness/dollar graph is closer to linear. Once you have more money than that, it's closer to a log graph. Someone in the first group has a lot more negative consequences from losing half their money. They should go with somewhat-safe bets and the moderate gains will help them a lot. Someone in the second group isn't impacted much if they lose half their money. But they need huge returns if they really want to improve their state of life. They are a much better fit to the risky high-value investment.

maratd 10y ago
> The reason it's easy for them to invest is that they can spare a big fraction of their money and even if it catches fire they won't lose their shirt. Let's do an experiment! Take $2K out of your savings account. Put $1K in one pocket and $1K in the other pocket. Your left pocket is your safety net and your right pocket is your "get rich" fund. Now go to a casino. Play a little. After that, let me know what you think about rich people "investing" their money, my analogy, and how they should really do it.
- Dylan16807 10y ago
  I don't understand where you're going with this at all. The decision-making I outlined depends on net worth, and you didn't specify whether I'm rich or poor. The decision-making I outlined says to never try to make money at a casino, because the expected returns are negative. But if I assume I'm rich, and I spend my $1K at the casino... well I probably have some alcohol and have fun, so great? I still have tons of money left?? I'm really not sure what this is supposed to demonstrate. If I'm poor then I lose it all and I'm sad because I needed that money. The very fact that you call it a "get rich" fund is totally against my argument. I said you should not use risky bets to try to get rich. Only risk your money if you can spare the money. (And only risk your money on things with high expected returns, duh.)
  - maratd 10y ago
    > I don't understand where you're going with this at all. Because you've never been to a casino. Because you've never gambled and won. Because you don't understand human nature. Because you're trying to rationalize your way to the answer through logic, but people don't invest or live that way. If you try what I asked you to do, you'll understand. You'll also understand why those who are wealthy invest the way they do and why I said what I did. I'll repeat what I said. It makes perfect sense for those who are wealthy to invest conservatively. If you find yourself with lots of money at the casino, the best course of action is to leave.
    - 10y ago