5 ms·

He's misunderstanding. For it to "make sense" for you to pay $9,000 for a 1% shot of winning a million, you don't need to have to be able to make that same wage

He's misunderstanding. For it to "make sense" for you to pay $9,000 for a 1% shot of winning a million, you don't need to have to be able to make that same wager many times. You have to look at the long term. Life will present you with many different wagers with positive expectation, but it often won't present you with the same one multiple times. Maybe it will give you that shot, then the next time give you a +EV chance to invest in the startup, then later give you the opportunity to play the St Petersburg game for $2, etc. Keep taking the +EV wagers over your lifetime and you'll end up way ahead, even if you never take the same exact one twice. You don't need a good sample size for an individual wager to be a good idea, just for all wagers combined. All of that assumes, of course, that taking any one wager doesn't prevent you from many others. Taking the $9k wager if you have $9k to your name will. Taking it if you have $10m to your name won't and therefore is a no-brainer. *Edited to account for Kelly Criterion. Thanks Aston

mhb 18y ago
Along these same lines, it's very surprising how many people who could easily afford a new car have collision insurance.
diego 18y ago
It's not a no-brainer. Does "winning one million" means that you have to do absolutely no work, spend no time at all and the money is tax-free? The answer most likely will be no. Taxes alone make the expected value negative. The more important problem is that many times it's hard to determine whether a "wager" has a positive or negative expectation, compounded by the fact that the positive value has to be utility to you rather than just money.
- mattmaroon 18y ago
  Taxes alone don't necessarily make it EV negative. For me it wouldn't be since I already have substantial gambling income to deduct from. (Unless you're a professional gambler, you can't deduct more than you earn.) But you're right, for most people that one particular wager would, assuming they were going to get a 1099 if they won. (Most money made from gambling goes unclaimed, as it doesn't take place in a casino.) Startup investing is somewhat the opposite I suppose, where taxes actually makes it more profitable. If you lose, you can deduct the loss, if you win, you usually pay the much lower capital gains taxes. (Unless I'm misunderstanding the tax ramifications of a losing angel investment, which I may certainly be.)
  - diego 18y ago
    Taxes were just an example. My issue is when you say: Life will present you with many different wagers with positive expectations and then you give the example of a startup. The problem is that you make it sound as if it's always easy to identify the wagers with positive expectation. Of course if you pick enough wagers with positive expectation you will come out ahead, but other than for chance games you simply don't know the expected value of your gamble. The closest you can get is by looking at past returns for certain well-known investments and hope that the future returns will be similar. For most "wagers" there isn't enough data.
- philwelch 18y ago
  I think you're missing the point of the exercise. It's like you're assigned a physics problem about point masses on frictionless surfaces and you answer the question by saying it's irrelevant in the real world because masses are distributed over volumes and surfaces are never frictionless. Yes, of course you have to factor in taxes and time and so on and so forth. But that's not what the question was about in the first place. You never see idealized physics problems in the real world either but what you learn from naive, simplified applications of classical physics still gets you somewhere in real world problems. Same with EV calculations. The point is that EV is an incomplete measure of value when it comes to evaluating gambles, not that you have to pay taxes. EV doesn't work on one-off situations, like if you're on a game show with Howie Mandel.
  - diego 18y ago
    No, I understand that point perfectly. My point was that in order for you to be able to evaluate whether a gamble makes sense repeatedly, you have to be sure that each instance has a positive EV. Say that you planned to do the 9k with %1 chance of a million payout enough times to take advantage of probabilities. You could have found out much later that the gamble had a negative EV. This is my point: the parent made it sound like you can evaluate all decisions as if the EV was easy to establish. In reality that's a rare case.
    - philwelch 18y ago
      In reality, there are no point masses or frictionless surfaces, either. Maybe you perfectly understand the point and you're moving on to various niggling contingencies. That's fine. The article is trying to explain something more basic than what you're talking about. You're doing the equivalent of butting into a freshman physics lecture and pointing out everything they've oversimplified, which is just plain obnoxious.
      - diego 18y ago
        I'm not commenting on the article. I agree with the article, which in fact talks only about wagers with quantifiable EV. My comment was a reply to mattmaroon's observation that over the course of a lifetime someone can find enough wagers with a positive value to eventually come out ahead. Please read the entire thread. http://news.ycombinator.com/item?id=560109 http://news.ycombinator.com/item?id=560109
aston 18y ago
Not overspending out of your bankroll to take a wager, +EV or not, is pretty important. You probably wanna stick pretty near to (or beneath) the Kelly Criterion (http://en.wikipedia.org/wiki/Kelly_criterion http://en.wikipedia.org/wiki/Kelly_criterion). In the case of Aaron's game, you should only be willing to put down $9000 for that game if you have on the order of $8.9 million to gamble with.
- DaniFong 18y ago
  How far beneath the Kelly criterion depends on the game. In gambling scenarios you can estimate the risk relatively easily. In investment scenarios, it's much harder, so there's an additional 'risk model uncertainty,' representing whether your risk model is off. In fact most investors famous for using the Kelly Criterion (Warren Buffett, Bill Gross - on Bonds) stick to the domains that they know.

mhb 18y ago

Along these same lines, it's very surprising how many people who could easily afford a new car have collision insurance.

diego 18y ago

It's not a no-brainer. Does "winning one million" means that you have to do absolutely no work, spend no time at all and the money is tax-free? The answer most likely will be no. Taxes alone make the expected value negative. The more important problem is that many times it's hard to determine whether a "wager" has a positive or negative expectation, compounded by the fact that the positive value has to be utility to you rather than just money.

mattmaroon 18y ago
Taxes alone don't necessarily make it EV negative. For me it wouldn't be since I already have substantial gambling income to deduct from. (Unless you're a professional gambler, you can't deduct more than you earn.) But you're right, for most people that one particular wager would, assuming they were going to get a 1099 if they won. (Most money made from gambling goes unclaimed, as it doesn't take place in a casino.) Startup investing is somewhat the opposite I suppose, where taxes actually makes it more profitable. If you lose, you can deduct the loss, if you win, you usually pay the much lower capital gains taxes. (Unless I'm misunderstanding the tax ramifications of a losing angel investment, which I may certainly be.)
- diego 18y ago
  Taxes were just an example. My issue is when you say: Life will present you with many different wagers with positive expectations and then you give the example of a startup. The problem is that you make it sound as if it's always easy to identify the wagers with positive expectation. Of course if you pick enough wagers with positive expectation you will come out ahead, but other than for chance games you simply don't know the expected value of your gamble. The closest you can get is by looking at past returns for certain well-known investments and hope that the future returns will be similar. For most "wagers" there isn't enough data.
philwelch 18y ago
I think you're missing the point of the exercise. It's like you're assigned a physics problem about point masses on frictionless surfaces and you answer the question by saying it's irrelevant in the real world because masses are distributed over volumes and surfaces are never frictionless. Yes, of course you have to factor in taxes and time and so on and so forth. But that's not what the question was about in the first place. You never see idealized physics problems in the real world either but what you learn from naive, simplified applications of classical physics still gets you somewhere in real world problems. Same with EV calculations. The point is that EV is an incomplete measure of value when it comes to evaluating gambles, not that you have to pay taxes. EV doesn't work on one-off situations, like if you're on a game show with Howie Mandel.
- diego 18y ago
  No, I understand that point perfectly. My point was that in order for you to be able to evaluate whether a gamble makes sense repeatedly, you have to be sure that each instance has a positive EV. Say that you planned to do the 9k with %1 chance of a million payout enough times to take advantage of probabilities. You could have found out much later that the gamble had a negative EV. This is my point: the parent made it sound like you can evaluate all decisions as if the EV was easy to establish. In reality that's a rare case.
  - philwelch 18y ago
    In reality, there are no point masses or frictionless surfaces, either. Maybe you perfectly understand the point and you're moving on to various niggling contingencies. That's fine. The article is trying to explain something more basic than what you're talking about. You're doing the equivalent of butting into a freshman physics lecture and pointing out everything they've oversimplified, which is just plain obnoxious.
    - diego 18y ago
      I'm not commenting on the article. I agree with the article, which in fact talks only about wagers with quantifiable EV. My comment was a reply to mattmaroon's observation that over the course of a lifetime someone can find enough wagers with a positive value to eventually come out ahead. Please read the entire thread. http://news.ycombinator.com/item?id=560109 http://news.ycombinator.com/item?id=560109

aston 18y ago

Not overspending out of your bankroll to take a wager, +EV or not, is pretty important. You probably wanna stick pretty near to (or beneath) the Kelly Criterion (http://en.wikipedia.org/wiki/Kelly_criterion http://en.wikipedia.org/wiki/Kelly_criterion). In the case of Aaron's game, you should only be willing to put down $9000 for that game if you have on the order of $8.9 million to gamble with.

DaniFong 18y ago
How far beneath the Kelly criterion depends on the game. In gambling scenarios you can estimate the risk relatively easily. In investment scenarios, it's much harder, so there's an additional 'risk model uncertainty,' representing whether your risk model is off. In fact most investors famous for using the Kelly Criterion (Warren Buffett, Bill Gross - on Bonds) stick to the domains that they know.