on risk / chanceand the office betting pool

risk profiles

risk-aversive

risk-neutral

risk-loving

risk profiles

risk profiles

risk-aversive

risk-neutral

risk-loving individuals are aversive to risk, but we are also attracted to it

risk profiles

risk-aversive

risk-neutral

risk-loving it is part of human nature to be attracted to risk...

risk profiles

risk-aversive

risk-neutral

risk-loving it is part of human nature to be attracted to risk...even if there is no rational payoff

they changewith age, events, people, wealth, and situations

risk profiles

risk premium

the difference between the return on a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities.

risk premium

“ as the risk aversion increases, so does the risk premium ”

the duality of risk

risk premium

“ It is precisely because investors are risk averse that they care about risk,

and the choices they make will reflect their risk aversion. ”

the duality of risk

risk premium

“ As the risk aversion of an individual increases, the risk premium demanded

for any given risky gamble (that they will take) will also increase. ”

the duality of risk

risk premium

risk premium = expected value - certainty equivalent increases, the risk

premium demanded for any given risky gamble will also increase. ”

the duality of risk

risk premium

risk premium = expected value - certainty equivalent increases, the risk

premium demanded for any given risky gamble will also increase. ”

the duality of risk

The simultaneous purchase and sale of an asset in order to profit from a difference in the price.

arbitrage

Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

arbitrage

Contingencies by definition depend on chance, and therefore can’t ever be perfectly thought out.

arbitrage

“...First, the crime would need to be obscure and confusing, making it difficult to detect.

...Second, the crime should involve many people engaging in the same type of crime so that no one can point a finger at you.

...Third, your crime will need to fall under the shady umbrella of plausible deniability so that if you do get caught, you can always say you didn’t know it was wrong in the first place

...If you really want to go all out, do something you can spin in a positive light, and maybe even create an ideology around it… You can also resort to opaque and promising-sounding language to make your case; you’re “restoring equilibrium,” “eliminating arbitrage” and creating “opportunity” and “efficiency” across the board.

...Crimes like burglaries are the least ideal crime: they’re simple, detectable, perpetrated by a single or just a few people.”

-- Dan Ariely

arbitrage

Speculative trading strategy of providing liquidity to owners of a stock that is currently the target of an announced acquisition. One of several event-driven strategies that seeks to identify and exploit relative mispricings of securities whose issuers are involved in mergers or other corporate events.

They are implemented to be market neutral.

risk arbitrage(M&A arbitrage)

- The acquiring company offers to buy the target’s stock at a premium offer price > current market price.

- Upon announcement of the acquisition, the target’s stock price generally rises to a level just below the offer price (just below, due to uncertainty about the merger actually taking place).

- There are many things that can block the merger from happening. If and when a merger fails to go through, the target’s stock price will immediately fall, often to a level below where it was before the merger was announced.

- The mere possibility of this is called deal risk

risk arbitrage(M&A arbitrage)

- Many shareholders choose to sell. It is risk arbitragers who choose to buy.

- Risk arbitragers are experts in assessing deal risk.

- Such event-driven speculative trading strategies are widely employed by certain hedge funds and proprietary traders.

risk arbitrage(M&A arbitrage)

http://riskencyclopedia.com/articles/event_driven_strategy/

http://riskencyclopedia.com/articles/event_driven_strategy/

Experts understand the duality of risk and they are experts at assessing risk,so they arbitrage against market inefficiencies

Where many sell (buy), they buy (sell)

Office Betting Pool

Before...

Office Betting Pool

After...

Office Betting Pool

“My bet [City A] (I hope [City B])”

“I would like to stay in [City A], but will bet on [City B], so it will be a happy ending.”

Motives

Office Betting Pool

I think inherently, I want the office to be in [City A], cuz I like how the office is right now. I think [City A] helps us capture the office environment, which would be maintained if we moved to a [City A] office. Eventually when we grow to a much larger scale, [City B] is inevitable.

Motives

I think we'll probably move, based on conversations, etc.

Because I want our office to be in Berkeley but chose [City B] so that at least I'll get some compensation for the outcome

Because I flipped a coin

1) I want the office to be in [City B] 2) don't want to anger the gods by hedging 3) I think it's in our long term interests to be in [City B]

because I'm going to be sad if we stay in [City A] either regardless if I win and if we move to [City B] I'll be happy so I should try for extra happy pandas

I think that is the choice Ion will make

Because I want our office to be in [City A] but chose [City B] so that at least I'll get some compensation for the outcome

Office Betting Pool

After...

1 person will earn $140

or...

7 people will earn $2.86