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>>So, if you look at the world as repetition of bets, under condition of survival, then mental accounting is not only not irrational but is necessary. Any other

>>So, if you look at the world as repetition of bets, under condition of survival, then mental accounting is not only not irrational but is necessary. Any other strategy would be effectively irrational. No, it's still irrational and it doesn't matter if there is repetition of bets or just one available. Depending on your total net worth, living conditions and values you have there are good bets and bad bets. A good bet is a bet which maximizes expected utility of your money. It changes depending on your net worth of course. It doesn't matter if you have just won or lost (this is mental accounting) it matters what's your total net worth is at given time. >>Actually, what I’m saying is even stronger. I am saying that even if you have the edge, in the presence of the probability of ruin, you will be ruined. Even if you had the edge … If you play long enough. He wouldn't pass 1st year college math course with that one. >>Unless you engage in strategies designed by traders and rediscovered by every single surviving trader, very similar to what we call, something called the Kelly Criterion, which is to play with the house money He doesn't grok what Kelly Criterion is either. Kelly Criterion determines a size of the bet which maximizes utility of money modeled as a logarithmic funciton. That's it. It doesn't matter if there is string of bets available or just one bet. If you have just won or lost doesn't matter either (only your total net worth at given point). >>And this is called, playing with the market money or playing with the house money. It's called being confused about basic math and economic concepts and then criticizing people who worked on those. Typical Taleb: confused, wrong, having no new insights to offer but making up for those with new terms (absorbent barriers, really?) and a lot of words.

cardmagic 9y ago
>> Actually, what I’m saying is even stronger. I am saying that even if you have the edge, in the presence of the probability of ruin, you will be ruined. Even if you had the edge … If you play long enough. > He wouldn't pass 1st year college math course with that one. Seems pretty straightforward to me. Let's say you play a game with an edge where you win 2x your money 99% of the time. But if you lose once, you lose all your money (1% risk of ruin). If you play this game 70 times, you are very likely to end up ruined. It’s a lot like smoking. One cigarette won’t kill you, but add up the probability cigarette after cigarette, pack after pack, year after year and the probability starts to skyrocket.
- DanAndersen 9y ago
  Exactly. I've often felt that a lot of the "wow humans are so irrationally risk-averse when it comes to money" conclusions that some researchers make are suffering from limitations of extremely limited models. For example, imagine a stranger comes up to you on the street and offers you a coin game, where if you win you gain $1 billion, but if you lose you owe him $1 million. The simplified model would claim that you should play the game because the expected value is positive. A more nuanced model would understand that being that much in debt would be a lot more suffering for me than the offset from whatever I'd do with a billion dollars. Even if the coin was weighted more in my favor, and the penalty was less, an even more nuanced model would recognize that I'm probably doing OK enough in my life with the money I have and that anything to chip away at that is an unnecessary risk. And then a model that even more completely captures the interplay of reasoning that humans do would acknowledge "wait a second, who the hell is this random stranger offering me a devil's bargain?" The researcher with a simple model would say "oh, just ignore that, just take the situation at face value," but that's never how any decision is made. Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. All that complexity is lost if you only think in simple terms of expected value and single-iteration games.
  - OscarCunningham 9y ago
    I think you're giving researchers too little credit in your first example. They do at least know that rational agents maximise expected utility, not just expected money. And then whenever they do a study they are very careful to fully convince subjects that there is no trickery going on. And then when interviewed the subjects don't say "I suspected trickery". So I think that such studies are justified in concluding that the subjects are acting irrationally. >Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. Right, right. But the question of "why do people make irrational decisions?" is exactly what the researchers are studying. They agree with you! The answer is that decisions which are irrational in one domain would be rational in the domain we were designed for.
trgn 9y ago
Using new words for existing concepts shows a lack of interest to delve deep into the existing state-of-the-art. Anti-fragile is another example. Why not call it sturdy, robust, solid. Dude, English's been around long enough to have words for that concept! Taleb's merits are more literally than substantial. He's - and I hesitate to say this - somewhat of a charlatan. He targets an audience that considers itself smart, casts experts outside as idiots or malicious hucksters (but not his readers of course, who, with his help, see through the ruse), uses a few TedX-ie rethorics to present a supposed alternative revolutionary idea (like using big words, or using unexpected multi-disciplinary comparisons), and all done with supreme confidence. As long as he's selling books and talks, it's fine and fun, but I would never ask him to look after my laptop when going to the bathroom in Starbucks.
- DanAndersen 9y ago
  >Anti-fragile is another example. Why not call it sturdy, robust, solid. Dude, English's been around long enough to have words for that concept! He literally addresses that point in his book "Antifragile." The point he was wanting to make is that the systems he talks about are not merely resilient or resistant to stress or damage -- but rather they are systems that get more robust or strong as a direct result of damage or stress. That's the property that is harder to find a nice concise English word for.
  - trgn 9y ago
    I did not know that, thank you.
    - WillPostForFood 9y ago
      Why are you willing to call him a charlatan or claim he lacks the character to look after your laptop when you haven’t even read the book you are criticizing?
OscarCunningham 9y ago
I totally agree with your summary, but to be fair to Taleb "absorbent barrier" is a real term from the study of Markov Chains. (https://en.wikipedia.org/wiki/Markov_chain#Absorbing_states https://en.wikipedia.org/wiki/Markov_chain#Absorbing_states)
- freyir 9y ago
  The term is absorbing barrier. Synonymous words, but nobody says absorbent barrier.
  - OscarCunningham 9y ago
    The original audio isn't actually good enough to tell which of these he's saying.
- bllguo 9y ago
  Even then, he did twist 'absorbing states' into the basically unused "absorbent barrier." It's good you brought up Markov chains; I can't believe they haven't been mentioned in the article or the comments
sl8r 9y ago
One interpretation of Kelly is maximizing the e.v. of the log return. Another (equivalent) interpretation is maximizing the expected IRR -- which is where the "in the long run" comment comes in, since "in the long run" you care more about the internal rate of return than the expected value of any individual bet. E.g., imagine a bet that costs $1 to play and pays out $2 with probability 60% and $0 with probability 1%. How much would you bet? The expected value of the bet is $1.2 per dollar you bet, so for a single bet, you might wager 100% of your bankroll. But "in the long run" you'll loose all your money doing this. Instead, Kelly would recommend that you bet only 20% of your bankroll. "In the long run", you'll make infinite money doing this. (Not only that, but there's no other strategy that will make you money faster.)
- OscarCunningham 9y ago
  >(Not only that, but there's no other strategy that will make you money faster.) That's not true. If you bet 99% of your money each time then there's still no probability that you go bankrupt (it's literally impossible to go bankrupt unless you bet all your money), and you make money much faster. Perhaps we could add in a lower bound, like you have to stop betting if you have less than $1. But then it's possible to go bankrupt even if you use the Kelly criterion. Furthermore we've introduced a fixed quantity into the problem, which means there's no longer any justification for saying that your bet should be the same proportion of your wealth every turn. I've never yet seen a convincing argument for Kelly betting aside from the when utility is logarithmic.
  - ThrustVectoring 9y ago
    >If you bet 99% of your money each time then there's still no probability that you go bankrupt (it's literally impossible to go bankrupt unless you bet all your money), and you make money much faster. Go back and read through the Math for the Kelly Criterion - when you know your edge and odds, it's the optimal solution. It's basically the balance point between taking advantage of current betting opportunities and preserving capital to take advantage of future betting opportunities. If you bet 99% of your money on a coin flip, you'll eventually lose a flip and have too little money to take advantage of future coin flips. Let me try another explanation: your return from a series of coinflips comes from two sources. The first is the return from the next coin flip, which when you have an edge, makes you want to bet as much as possible on this flip. The second is the return from all future flips, which makes you want to bet less so that a poor result doesn't permanently diminish your ability to make bets. Mathematically, the Kelley Criterion is the point where adding or removing bet sizing moves these two values the same amount, resulting in a change in expected value per bet size of zero, which means it's a maximum.
choffstein 9y ago
"Kelly maximizes utility of money modeled as a logarithmic function." Absolutely true, but consider what log utility also creates a decision rule that leads to growth-rate optimization under multiplicative bets. You may find these notes from Ole Peters interesting https://ergodicityeconomics.files.wordpress.com/2017/03/ergodicity_economics_20170824.pdf https://ergodicityeconomics.files.wordpress.com/2017/03/ergo...

cardmagic 9y ago

>> Actually, what I’m saying is even stronger. I am saying that even if you have the edge, in the presence of the probability of ruin, you will be ruined. Even if you had the edge … If you play long enough. > He wouldn't pass 1st year college math course with that one. Seems pretty straightforward to me. Let's say you play a game with an edge where you win 2x your money 99% of the time. But if you lose once, you lose all your money (1% risk of ruin). If you play this game 70 times, you are very likely to end up ruined. It’s a lot like smoking. One cigarette won’t kill you, but add up the probability cigarette after cigarette, pack after pack, year after year and the probability starts to skyrocket.

DanAndersen 9y ago
Exactly. I've often felt that a lot of the "wow humans are so irrationally risk-averse when it comes to money" conclusions that some researchers make are suffering from limitations of extremely limited models. For example, imagine a stranger comes up to you on the street and offers you a coin game, where if you win you gain $1 billion, but if you lose you owe him $1 million. The simplified model would claim that you should play the game because the expected value is positive. A more nuanced model would understand that being that much in debt would be a lot more suffering for me than the offset from whatever I'd do with a billion dollars. Even if the coin was weighted more in my favor, and the penalty was less, an even more nuanced model would recognize that I'm probably doing OK enough in my life with the money I have and that anything to chip away at that is an unnecessary risk. And then a model that even more completely captures the interplay of reasoning that humans do would acknowledge "wait a second, who the hell is this random stranger offering me a devil's bargain?" The researcher with a simple model would say "oh, just ignore that, just take the situation at face value," but that's never how any decision is made. Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. All that complexity is lost if you only think in simple terms of expected value and single-iteration games.
- OscarCunningham 9y ago
  I think you're giving researchers too little credit in your first example. They do at least know that rational agents maximise expected utility, not just expected money. And then whenever they do a study they are very careful to fully convince subjects that there is no trickery going on. And then when interviewed the subjects don't say "I suspected trickery". So I think that such studies are justified in concluding that the subjects are acting irrationally. >Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. Right, right. But the question of "why do people make irrational decisions?" is exactly what the researchers are studying. They agree with you! The answer is that decisions which are irrational in one domain would be rational in the domain we were designed for.

trgn 9y ago

Using new words for existing concepts shows a lack of interest to delve deep into the existing state-of-the-art. Anti-fragile is another example. Why not call it sturdy, robust, solid. Dude, English's been around long enough to have words for that concept! Taleb's merits are more literally than substantial. He's - and I hesitate to say this - somewhat of a charlatan. He targets an audience that considers itself smart, casts experts outside as idiots or malicious hucksters (but not his readers of course, who, with his help, see through the ruse), uses a few TedX-ie rethorics to present a supposed alternative revolutionary idea (like using big words, or using unexpected multi-disciplinary comparisons), and all done with supreme confidence. As long as he's selling books and talks, it's fine and fun, but I would never ask him to look after my laptop when going to the bathroom in Starbucks.

DanAndersen 9y ago
>Anti-fragile is another example. Why not call it sturdy, robust, solid. Dude, English's been around long enough to have words for that concept! He literally addresses that point in his book "Antifragile." The point he was wanting to make is that the systems he talks about are not merely resilient or resistant to stress or damage -- but rather they are systems that get more robust or strong as a direct result of damage or stress. That's the property that is harder to find a nice concise English word for.
- trgn 9y ago
  I did not know that, thank you.
  - WillPostForFood 9y ago
    Why are you willing to call him a charlatan or claim he lacks the character to look after your laptop when you haven’t even read the book you are criticizing?

OscarCunningham 9y ago

I totally agree with your summary, but to be fair to Taleb "absorbent barrier" is a real term from the study of Markov Chains. (https://en.wikipedia.org/wiki/Markov_chain#Absorbing_states https://en.wikipedia.org/wiki/Markov_chain#Absorbing_states)

freyir 9y ago
The term is absorbing barrier. Synonymous words, but nobody says absorbent barrier.
- OscarCunningham 9y ago
  The original audio isn't actually good enough to tell which of these he's saying.
bllguo 9y ago
Even then, he did twist 'absorbing states' into the basically unused "absorbent barrier." It's good you brought up Markov chains; I can't believe they haven't been mentioned in the article or the comments

sl8r 9y ago

One interpretation of Kelly is maximizing the e.v. of the log return. Another (equivalent) interpretation is maximizing the expected IRR -- which is where the "in the long run" comment comes in, since "in the long run" you care more about the internal rate of return than the expected value of any individual bet. E.g., imagine a bet that costs $1 to play and pays out $2 with probability 60% and $0 with probability 1%. How much would you bet? The expected value of the bet is $1.2 per dollar you bet, so for a single bet, you might wager 100% of your bankroll. But "in the long run" you'll loose all your money doing this. Instead, Kelly would recommend that you bet only 20% of your bankroll. "In the long run", you'll make infinite money doing this. (Not only that, but there's no other strategy that will make you money faster.)

OscarCunningham 9y ago
>(Not only that, but there's no other strategy that will make you money faster.) That's not true. If you bet 99% of your money each time then there's still no probability that you go bankrupt (it's literally impossible to go bankrupt unless you bet all your money), and you make money much faster. Perhaps we could add in a lower bound, like you have to stop betting if you have less than $1. But then it's possible to go bankrupt even if you use the Kelly criterion. Furthermore we've introduced a fixed quantity into the problem, which means there's no longer any justification for saying that your bet should be the same proportion of your wealth every turn. I've never yet seen a convincing argument for Kelly betting aside from the when utility is logarithmic.
- ThrustVectoring 9y ago
  >If you bet 99% of your money each time then there's still no probability that you go bankrupt (it's literally impossible to go bankrupt unless you bet all your money), and you make money much faster. Go back and read through the Math for the Kelly Criterion - when you know your edge and odds, it's the optimal solution. It's basically the balance point between taking advantage of current betting opportunities and preserving capital to take advantage of future betting opportunities. If you bet 99% of your money on a coin flip, you'll eventually lose a flip and have too little money to take advantage of future coin flips. Let me try another explanation: your return from a series of coinflips comes from two sources. The first is the return from the next coin flip, which when you have an edge, makes you want to bet as much as possible on this flip. The second is the return from all future flips, which makes you want to bet less so that a poor result doesn't permanently diminish your ability to make bets. Mathematically, the Kelley Criterion is the point where adding or removing bet sizing moves these two values the same amount, resulting in a change in expected value per bet size of zero, which means it's a maximum.

choffstein 9y ago

"Kelly maximizes utility of money modeled as a logarithmic function." Absolutely true, but consider what log utility also creates a decision rule that leads to growth-rate optimization under multiplicative bets. You may find these notes from Ole Peters interesting https://ergodicityeconomics.files.wordpress.com/2017/03/ergodicity_economics_20170824.pdf https://ergodicityeconomics.files.wordpress.com/2017/03/ergo...