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If you have a budget constraint, it's rational for you to buy argmax(true(A) - market_value(A), true(B) - market_value(B)), which is exactly the Pareto-efficien
by qsort 5y ago
If you have a budget constraint, it's rational for you to buy argmax(true(A) - market_value(A), true(B) - market_value(B)), which is exactly the Pareto-efficient behavior.
- Imnimo 5y agoThat's where I disagree. Your expected value on buying A is (probability A is implemented) * (true(A) - market_value(A), and similarly for B, because your receive zero return if the thing you bet on is not implemented. Thus, even if A is badly mispriced, you may not want to buy it if it has very low probability of being implemented.