Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Given a bets/gamble with an associate probability, which would you choose?
You can obviously answer this however you like, but my idea is for you to choose what your GUT instinct tells you.
I.e., imagine being out in the wild, and you had to make a snap decision... what would your answer be?
The game being played is unimportant. You are simply supplied with statistics of expected outcomes.
Option A: A GUARANTEED win of $100
Option B: A possibility of $200, with a 30% chance of losing.
Further, this is not part of the poll, but would your opinion change given a SERIES of bets, say 10?
Another thought to ponder... let's say that the dollar amount were higher... I.e., if the bet was the same, but the amount was $1mil/guaranteed, $2mil/70%... would that change your opinion?
EDIT---
To Clarify... assume you have sat down to place a gamble/bet in a game you play, and you KNOW the odds.
So you are putting your money up at risk to play the game.
I debated adding this clarification from the start, and I think given the questions just now, it is warranted to add.
So the answer is yes, you are putting your $100 at risk, for the prospect of gaining a guaranteed $100, or the CHANCE to gain $200.
So the purpose of this survey, is based on an idea in behavioral finance, with the focus being on "Prospect Theory," pioneered by Daniel Kahneman and Amos Tversky.
The general idea is that we value gains and losses differently, assigning different weightings to them mentally. This supposedly influences our decisions. This is also known as 'loss-aversion.'
Many demonstrations of this offer EQUAL choices, and the participant will typically choose the one that is more loss-aversive. The poll question was deliberately skewed in the favor of the HIGHER payout, but we are still seemingly hard-wired to select the one that is most risk-adverse(LOWER PAYOUT), and offers a more certain payout.
I.e., the potential win of the $100 seems more appealing than the expectancy of the $140 in Option B($200*70%).
Visually, this offers a utility function attached in the image, where you can see how it is naturally skewed to be risk avoidant. You can see the value function is is steeper for our losses... I.e., we are quicker to take gains than we are to take losses.
This may explain some bad choices we make when trading, and how we may have different thoughts depending on where a position may sit, relative to where we started from. I.e., the vertical line in the graph above is our REFERENCE point.
When faced with a choice leading to gains, we are risk-averse... but we may be risk-seeking when faced with a loss. This may explain why some people may be more likely to HOLD a losing position, as as long as it is open, we have not accepted the loss yet. I do also believe this extends much further than simply how we hold/release a position, but the general way the market may function... I.e., how the collection of traders view the thing(market) as a whole.
In general, people are likely to choose options that offer lower expectancy with more certainty.
To help visualize this, here is a different example than framed in the poll.
SCENARIO 1:
Option A: 50% chance of WINNING $1000, and 50% chance of WINNING $0.
Option B: 100% chance of WINNING $500.
SCENARIO 2:
Option A: 50% chance of LOSING $1000 and a 50% chance of LOSING $0
Option B: 100% chance of LOSING $500.
Prospect theory suggest that MOST people will choose Option B from scenario 1, and Option A from scenario 2. We select the most sure thing when faced with the potential WIN, but try hard to avoid the loss in Scenario 2, hoping to be able to walk away with LOSING $0.
In short, we don't like losing.
THis is likely a ham-fisted explanation. So there are better explanations below: Wiki Investopedia YT Vid I got the SCENARIOs listed above from
Another YT Vid
I think holding on to losers is a responsibility problem as well. We generally don't want to take the responsibility for our mistakes and in real life it's pretty easy to lie to ourselves and say it's somebody elses fault. But if it comes to getting praise for something, we suddenly have forgotten pretty quick that whatever accomplishment we made wasn't likely not that much of our own ability or that luck played probably a big role as well.
The market gives us a pretty good reality check on this behaviour.
I like Kahnemann's book Thinking Fast and Slow. He describes a lot more fallacies we just aren't aware in it. Like in the question: Do you remember how many animals of each species Moses put on his ark?
I think we would be astounded how much dumb mistakes and bad decisions we make everyday just because we are too lazy to actually think and listen carefully.
Hopefully it will provide some more ideas to enhance our trading.
On the question, for a few hundred I'd go with the highest expectancy. For a few million I'll move towards the guaranteed win - I understand my fear of future regret.
Have you also read some of Nassim Taleb's books? I think of starting to go through some of them, but am wondering which one would be the best to start, concerning making me a better trader.
I have enjoyed his books but they don't affect my trading. I would recommend Fooled by Randomness, then The Black Swan. Whereas he spends a lot of energy on the unusual events, which are well worth being aware of in one's bet sizing estimations, my trading is about likely events (continuation of current apparent movement).
