3 ms·

If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don'

by tinco 6y ago

If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don't exist in investment. You can't say a bet is negative value when you don't know the odds, and the whole reason people are making so much money market making is that no one actually knows the odds, so no one knows the "real" value of any instrument. If you're trying to say we should come up with an expected value of the bet before making it, why not give an example on how you'd try that? The reminder of the Kelly Criterion is great, and I think the article would have been better with a little more practical example of how to apply it. The first half of the article feels like it could be condensed to "Gambling is when you pick bad investments" which is ridiculous..

jpalomaki 6y ago
You move from "gambling" to "investing" by analyzing the target company and coming up with your view of the correct price for the stock. You then compare this price to the market price. If market price is lower, buy. Otherwise don't. This is basically the same way professional sports betting works. People involved collect information about the teams and try to understand how this information affects the outcome of the match. Once they have established their own view on the probabilities, they check the odds bookmaker if offering and calculate the expected outcome, i.e. how much money will this bet give me. If your calculations are right, then repeating this over and over again will lead to profitable betting in long term. In a sense the gambling/investing distinction is just in your own head. Maybe you are so bad at evaluation the companies that a coin toss would be better predictor for success than your Excel sheets.
hntrader 6y ago
"You can't say a bet is negative value when you don't know the odds" You can. The whole idea of E(V) in trading, gambling, etc, is that V is an unknown distribution, and we're trying to estimate the mean of it using a combination of empirical observation and priors given to us by experience and expertise. Nowhere in this conceptual framework is the idea that we know for sure what the density of V is.
vardaro 6y ago
“It feels like negative value bets don't exist in investment.” Options are deliberately negative EV. They need to be negative EV to be long so that there is an incentive for option sellers to sell premium. Otherwise option seller would just get steamrolled every time.

by tinco 6y ago

jpalomaki 6y ago

You move from "gambling" to "investing" by analyzing the target company and coming up with your view of the correct price for the stock. You then compare this price to the market price. If market price is lower, buy. Otherwise don't. This is basically the same way professional sports betting works. People involved collect information about the teams and try to understand how this information affects the outcome of the match. Once they have established their own view on the probabilities, they check the odds bookmaker if offering and calculate the expected outcome, i.e. how much money will this bet give me. If your calculations are right, then repeating this over and over again will lead to profitable betting in long term. In a sense the gambling/investing distinction is just in your own head. Maybe you are so bad at evaluation the companies that a coin toss would be better predictor for success than your Excel sheets.

hntrader 6y ago

"You can't say a bet is negative value when you don't know the odds" You can. The whole idea of E(V) in trading, gambling, etc, is that V is an unknown distribution, and we're trying to estimate the mean of it using a combination of empirical observation and priors given to us by experience and expertise. Nowhere in this conceptual framework is the idea that we know for sure what the density of V is.

vardaro 6y ago

“It feels like negative value bets don't exist in investment.” Options are deliberately negative EV. They need to be negative EV to be long so that there is an incentive for option sellers to sell premium. Otherwise option seller would just get steamrolled every time.