What would you rather have? $10 million guaranteed or a coin toss for $100 million? The expected return of the gamble is 5 times larger.
Before you make your decision (most people would make the wrong one), let me point out a few principles:
- Utility diminishes the more money we have. Hence $100 million won't make you 10 times more satisfied than $10 million.
- There are more opportunities to make smaller amounts then a lump sum which makes it easier for risk diversification.
- Probabilities suggest that there can be no one who can always win. Therefore, All-In bets will always lead you to lose everything.
- You hear stories of those who took the big gambles and won. You seldom hear about the guys who took the gamble and lost. Those who remain successful, have changed their risk taking mentality once they have won.
- There is a difference between a bet and a calculated risk. The calculated risk is a decision made under conditions of known probabilities as opposed to uncertainty. 50% may not necessarily be a bad bet if the stakes are in your favour.
2 comments:
$10 million guaranteed...
but I guess I would ask first what I need to put in to get these outcomes. Though, no, it doesn't matter...coz if I can only chose between one of the other, I would still chose the guaranteed one...
We are different because of the way we are brought up....... Most people would pick the later choice.
Post a Comment