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> gambling on games with negative expected value There are different ways to treat "expected" - in one sense, by definition every stock has neutral expected va

by cactus2093 6y ago

> gambling on games with negative expected value There are different ways to treat "expected" - in one sense, by definition every stock has neutral expected value in the short term, that's what the market price is. And in the longer term, it has the expected value of the rate of increase of the overall market. Given what we've seen the overall market do in the past year, and the unprecedented combination of massive government relief spending and low interest rates, owning stocks at all right now seems to be a great idea. If you use a different way of calculating "expected", then everyone expected Gamestop to be worth very little based on all the traditional markers of a stock, future cash flows, etc. But those people were wrong for quite a while and many of them lost a lot of money, and many people who bet against the common wisdom made a lot of money. Even today the price is still a factor of 10 higher than what most analysts recently had it at. Basically, if you're so sure that this was a "negative expected value" bet for everyone who went long on gamestop, why wouldn't you short it today and make a ton of money? I agree that this stock run-up was a form of gambling, but it's dishonest to write all these people off as making bad decisions because it's not like there is a true expected value that anyone can calculate with certainty ahead of time.

mrfredward 6y ago
"Expected value" is a well-defined term from statistics: "In statistics and probability analysis, the expected value is calculated by multiplying each of the possible outcomes by the likelihood each outcome will occur and then summing all of those values." This explanation is from investopedia no less. Anyway, shorting gamestop has some probability distribution that includes every outcome from making a bunch of money to losing your shirt because of a viral meme (shorting losses have no theoretical limit). That distribution can simultaneously have positive expected value and also be an unattractive bet because of the risk involved...and that's before we talk about shorting fees.
- cactus2093 6y ago
  Yes thank you I am aware. The comment I was replying to made no sense in the context of a statistical expected value, because by definition that is just the current price, that was the first half of my comment

mrfredward 6y ago

"Expected value" is a well-defined term from statistics: "In statistics and probability analysis, the expected value is calculated by multiplying each of the possible outcomes by the likelihood each outcome will occur and then summing all of those values." This explanation is from investopedia no less. Anyway, shorting gamestop has some probability distribution that includes every outcome from making a bunch of money to losing your shirt because of a viral meme (shorting losses have no theoretical limit). That distribution can simultaneously have positive expected value and also be an unattractive bet because of the risk involved...and that's before we talk about shorting fees.

cactus2093 6y ago
Yes thank you I am aware. The comment I was replying to made no sense in the context of a statistical expected value, because by definition that is just the current price, that was the first half of my comment