On risk or chance (the office betting pool) slides

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Slides I presented to the office before announcing the results of the office betting pool which I carefully implemented the day prior to the announcement of our new office location. Took out additional explanation slides at the end where I explain how I felt the results of the betting pool would play out accordingly, even before the announcement was made. As it would turn out, ~90% of the participants in the betting pool had bet overwhelmingly in favor of the actual future outcome, despite earlier survey results that reported that preferences were 50/50 among people at the office.

Text of On risk or chance (the office betting pool) slides

  • 1. on risk / chanceand the office betting pool

2. risk profiles 3. risk profilesrisk-aversiverisk-neutralrisk-loving 4. risk profilesrisk-aversiverisk-neutralrisk-loving individuals are aversive to risk, butwe are also attracted to it 5. risk profilesrisk-aversiverisk-neutralrisk-loving it is part of human nature to beattracted to risk... 6. risk profilesrisk-aversiverisk-neutralrisk-loving it is part of human nature to beattracted to risk...even if there is no rationalpayoff 7. risk profilesthey changewith age, events, people, wealth, and situations 8. risk premiumthe difference between the return on a risky asset andless risky asset, which serves as compensation forinvestors to hold riskier securities. 9. risk premium as the risk aversion increases,so does the risk premium the duality of risk 10. 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 11. risk premium As the risk aversion of an individual increases, the risk premium demandedfor any given risky gamble (that they will take) will also increase. the duality of risk 12. risk premiumrisk premium = expected value - certainty equivalent increases, the riskpremium demanded for any given risky gamble will also increase. the duality of risk 13. risk premiumrisk premium = expected value - certainty equivalent increases, the riskpremium demanded for any given risky gamble will also increase. the duality of risk 14. The simultaneous purchase and sale of anasset in order to profit from a difference in theprice.arbitrage 15. Arbitrage exists as a result of marketinefficiencies; it provides a mechanism toensure prices do not deviate substantiallyfrom fair value for long periods of time.arbitrage 16. Contingencies by definition depend onchance, and therefore cant ever be perfectlythought out.arbitrage 17. ...First, the crime would need to be obscure and confusing, making itdifficult to detect....Second, the crime should involve many people engaging in the same typeof crime so that no one can point a finger at you....Third, your crime will need to fall under the shady umbrella of plausibledeniability so that if you do get caught, you can always say you didnt knowit was wrong in the first place...If you really want to go all out, do something you can spin in a positivelight, and maybe even create an ideology around it You can also resort toopaque and promising-sounding language to make your case; yourerestoring equilibrium, eliminating arbitrage and creating opportunity andefficiency across the board....Crimes like burglaries are the least ideal crime: theyre simple, detectable,perpetrated by a single or just a few people.-- Dan Arielyarbitrage 18. Speculative trading strategy of providing liquidity to ownersof a stock that is currently the target of an announcedacquisition. One of several event-driven strategies thatseeks to identify and exploit relative mispricings ofsecurities whose issuers are involved in mergers or othercorporate events.They are implemented to be market neutral.risk arbitrage(M&A arbitrage) 19. - The acquiring company offers to buy the targetsstock at a premium offer price > current market price.- Upon announcement of the acquisition, the targetsstock price generally rises to a level just below theoffer price (just below, due to uncertainty about themerger actually taking place).- There are many things that can block the merger fromhappening. If and when a merger fails to go through,the targets stock price will immediately fall, often to alevel below where it was before the merger wasannounced.- The mere possibility of this is called deal riskrisk arbitrage(M&A arbitrage) 20. - Many shareholders choose to sell. It is riskarbitragers who choose to buy.- Risk arbitragers are experts in assessing deal risk.- Such event-driven speculative trading strategies arewidely employed by certain hedge funds andproprietary traders.risk arbitrage(M&A arbitrage)http://riskencyclopedia.com/articles/event_driven_strategy/ 21. Experts understand the duality of risk andthey are experts at assessing risk,so they arbitrage against marketinefficienciesWhere many sell (buy), they buy (sell)http://riskencyclopedia.com/articles/event_driven_strategy/ 22. Office Betting PoolBefore... 23. Office Betting PoolAfter... 24. Office Betting PoolMy bet [City A] (Ihope [City B])I would like to stayin [City A], but willbet on [City B], so itwill be a happyending.Motives 25. Office Betting PoolI think inherently, I want the office to be in[City A], cuz I like how the office is rightnow. I think [City A] helps us capture theoffice environment, which would bemaintained if we moved to a [City A] office.Eventually when we grow to a much largerscale, [City B] is inevitable.MotivesBecause I flipped a coinBecause I want our office to be inBerkeley but chose [City B] so thatat least I'll get some compensationfor the outcomeI think we'll probably move,based on conversations, etc.1) I want the office to be in [CityB] 2) don't want to anger thegods by hedging 3) I think it's inour long term interests to be in[City B]because I'm going to be sad ifwe stay in [City A] eitherregardless if I win and if wemove to [City B] I'll be happy soI should try for extra happypandasI think that isthe choiceIon willmakeBecause I want our office to bein [City A] but chose [City B] sothat at least I'll get somecompensation for the outcome 26. Office Betting PoolAfter...1 person will earn $140or...7 people will earn $2.86