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Given a bets/gamble with an associate probability, which would you choose?


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View Poll Results: Which bet would you take?
A GUARANTEED win of $100 8 72.73%
A possibility of $200, with a 30% chance of losing. 3 27.27%
Voters: 11. You may not vote on this poll

 
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Given a bets/gamble with an associate probability, which would you choose?

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  #1 (permalink)
 forrestang 
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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.

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  #2 (permalink)
 xplorer 
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forrestang View Post

Option A: A GUARANTEED win of $100
Option B: A possibility of $200, with a 30% chance of losing.

I just want to clarify Option B:

is

'chance of losing' = 'not winning the $200'

or

'chance of losing' = losing money (if so, how much?)

?

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 addchild 
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If there's no risk of loss take the $200 bet for the individual and series bets.

Though this would be different for an amount that was meaningful, say 1M and 2M.

.
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 forrestang 
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xplorer View Post
I just want to clarify Option B:

is

'chance of losing' = 'not winning the $200'

or

'chance of losing' = losing money (if so, how much?)

?

This is a good question, I've updated the original post.

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 forrestang 
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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

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  #6 (permalink)
MrMojoRisin
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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.

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 forrestang 
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MrMojoRisin View Post
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.

I just started reading that book this morning.

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 kiwi 
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I'm looking forward to Kahneman's new book, due mid May, Noise: A Flaw in Human Judgment.

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.

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MrMojoRisin
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kiwi View Post
I'm looking forward to Kahneman's new book, due mid May, Noise: A Flaw in Human Judgment.

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.

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 kiwi 
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MrMojoRisin View Post
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).

Enjoy them though!

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 Sandpaddict 
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forrestang View Post
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

Forrestang your spot on.

Kahnemans a bit if a hearo of mine.

I absolutely love that diagram.

Great post! Very insightful writing.

In the absolute simplest terms...

Losing feels WAY WORSE than the winning FEELS good. Even IF your winners are larger. Every loss stings badly. Every win is easily forgotten. Which basically means we feel terrible ALL the time!

This game sucks... isn't it great!

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 Sandpaddict 
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kiwi View Post
I'm looking forward to Kahneman's new book, due mid May, Noise: A Flaw in Human Judgment.

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.

Months of looking for something to read and BOOM two amazing books, one thread.

I just pre-ordered my copy... so excited!

Thank you

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 Sandpaddict 
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MrMojoRisin View Post
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.

Another of my heros sort of speak. At least his writings.

I would say if you only had one to read, read "Fooled by Randomness".

Secondly I would recommend "The Black Swan"

Both are outstanding.

He has a few more. One on options derivatives trading and one to compete the "inconcerto" of the first two books mentioned but I think he ran out if ideas in The black Swan and just kept writing

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  #14 (permalink)
lightsun47
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Can I answer this?

I will pick (and already doing this irl) option A with GUARANTEED (or almost guaranteed in trading terms) $100 wins WITH INCREASING LOTS WITH TIME to multiply my wins.

Simple isn't it? But it feels like an eternity to reach here.

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