5 ms·

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

by 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
      - philwelch 18y ago
        I have read the entire thread and I just don't understand the point of your comment. Of course people have to pay taxes and spend time on investments. That doesn't make diversified investing a fool's errand. It's like we're trying to build a go-kart and you're saying "it'll never work because there's friction." Maybe there's friction, and we'll work out what that friction is, just as we'll calculate the post-tax EV of our investments.

by diego 18y ago

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
    - philwelch 18y ago
      I have read the entire thread and I just don't understand the point of your comment. Of course people have to pay taxes and spend time on investments. That doesn't make diversified investing a fool's errand. It's like we're trying to build a go-kart and you're saying "it'll never work because there's friction." Maybe there's friction, and we'll work out what that friction is, just as we'll calculate the post-tax EV of our investments.