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This is... false. For a number of reasons. Something can be economically rational at scale and still a gamble, because you do not have infinite funds. More impo
by kaiabwpdjqn 7y ago
This is... false. For a number of reasons. Something can be economically rational at scale and still a gamble, because you do not have infinite funds. More importantly, past results are not indicative of future results in valuations. Thinking that a thing must increase in value because it increased in value previously is perhaps the dumbest fallacy in in finance possible.
Option 1: I offer you 99,999/100,000 chance to lose everything you have, And a 1/100,000 chance to get 100,001 times more. Expected value is net positive. And yet, you’d be pretty dumb to do it. Gambling.
Option 2: I offer you 9/10 chance to get 1.01x more. 1/10 chance to get 0x. Expected loss. Better than 50% odds of gain. Gambling.
Option 3:
Coin toss. Triple your lifespan on heads. Die on tails. Definitely gambling.
- dmos62 7y agoI'm not sure I follow, but you're probably talking about a scenario where the risk/reward ratio is not 1:1. Sure, it's more complicated then. If you take a 10% chance bet 10 times and it has a risk of -1 and reward of +10, on average you'll get (-1 * 9) + (+10 * 1) = 1.
- kaiabwpdjqn 7y ago> bet 10 times The point in option 1 and 3 is to illustrate that betting 10 times isn’t an option in many systems. You can’t say you should always do something because the risk reward is favorable. That’s still gambling, and sometimes a stupid decision. The average outcome of a gamble is not the likely outcome of taking it. And even ignoring that, it’s still a gamble unless you can confidently run it at sufficient scale to hit the theoretical distribution.