I am a third of the way through Nate Silver’s latest book, and it has had me thinking about risk-taking. The biggest thing I have taken from it so far is that people are not taking enough risk, or more accurately, they’re not taking appropriate risks.
What is a good risk? Well, at its most basic, it’s one with a positive Expected Value, or EV. EV is basically the likelihood of the positive outcome, multiplied by the payout of the outcome, minus the cost. Lottery tickets have negative expected value, even when they have enormous jackpots; the minuscule odds of winning make it worth less than the cost of a ticket.
The first thing to avoid when dealing with risk is limiting downside, aka the worst thing that can happen. Train surfing is probably fun, but the downside, death, makes the activity, at least in my eyes, EV negative.
The ideal bet, then, is one which has minimal downside, very large upside, and ideally, an edge. They’re hard to find, as you can imagine, but I think I have found one that is close.
Next season, my favourite football club, Newcastle United, is playing in the Champions League, where they’ll play against the elite European clubs. In their 133 year history, they’ve only played in the competition three times.
It would be great to see them play under the lights against one of the top clubs, but alas, it is VERY expensive. And of course, with a child, even more so, because we’d all want to go. I frankly can’t afford it.
But what if I could make a bet on it? A $100 bet (plus the new user bonuses that they’re always giving out) would yield a payout of over $5k, enough to pay for the entire trip. The upside is a once in a lifetime experience. The downside is $100.
It feels like the right strategy, but I’ll sleep on it. The odds aren’t moving anytime soon.