Games of Risk
On life and decision-making
A note post-writing: I really liked this piece. I’m sitting at Ding Tea with my little brother, and I audibly said “I’m writing some heat in this one.” I think it’ll be worth reading the full article, and to the end as well. Please let me know if you enjoyed it!
A game of risk
I’ve recently had a few conversations that really questioned my level of risk appetite and how I’ve become relatively risk-seeking in my decision-making, both in life and in my investments. I thought the best way to organize my personal thoughts would be to propose a thought experiment. I’ll ask you the same question I’ll answer myself below. Then, I’ll share some personal thoughts.
Thought Experiment
Say you’re given the opportunity to win some money. Assume all trade-offs are zero (i.e., if you lose a 50% chance to win $100, you win nothing).
Series A
Option 1: You have a 100% chance to win $50
Option 2: You have a 50% chance to win $100
Option 3: You have a 25% chance to win $200
Option 4: You have a 10% chance to win $500
Series B
Option 1: You have a 100% chance to win $50,000
Option 2: You have a 50% chance to win $100,000
Option 3: You have a 25% chance to win $200,000
Option 4: You have a 10% chance to win $500,000
Let’s chat about Series A first. Which option would you choose? A mathematician would approach this game purely from an expected value (EV) standpoint. Unfortunately, all options provide you with equal EV. A gambling addict may select Option 4 simply because it provides the highest potential return on a dollar basis. Regardless of your background, your decision is coupled with your personal appetite for risk and contextualized to the history of your experiences with games of risk.
If you have a history of winning risk-based games, you’re more inclined to select Option 4 than Option 1. If we are in an economic downturn, individuals are probably more likely to select Option 1, unless they have that history of luck, making them more inclined to take the riskier bet, even if the EV was lower with a higher dollar return.
Personally, I’d aim for a 20-40% chance of winning if the EV was slightly higher than $50, given there is a higher dollar return. My objective decision-making is to take the 100% guarantee, but my emotional decision-making would lead me to take more risks, especially since this is an analogy for more subjective scenarios in life. (I promise I’m not stupid for not taking the guaranteed payout, it’s purely coupled with my current necessity for $50).
Now, let’s chat about Series B. The stakes have risen, and we’re playing with significantly more cash. In this scenario, given the audience of individuals who read this blog, you’re probably more likely to take the guaranteed payout. $50,000 guaranteed? No taxes? Damn, that’s convincing. Personally, I’d probably aim for an 80-90% chance of winning, given there is a higher dollar return. Why? Because realistically, my chances of winning are still pretty high and I never expected a $50,000 influx of cash anyways.
For me, the game of stakes changes because the reward is more coupled to my state of life. For the risk-loving rich man, these numbers are pocket-change. Why not take the 50% bet for $100,000? It’s not like $50,000 will change anything. Similarly, with real-life scenarios, your decision-making is coupled with your comfort in the trade-offs. In the worst-case scenario, you’re more willing to default to a safer outcome.
I think I’ve made my primary point. I think the conclusion I’ve come to with this mindset is: the more understanding you are of your personal situation, the more likely you’re able to make clear decisions relative to risk levels. When I see Series A and B presented to me, I feel confident in making my decision without loss of conviction. I understand my context well, and I know that I’m comfortable taking that risk.
In my day-to-day life, I am also fully aware of the trade-offs of my decision-making. With most of my career decisions, or even just decisions in general, I know that the trade-off is just trusting myself to figure it out. And that’s exactly what I’m conditioning my mind to do right now: solo travel across the world, force myself into uncomfortable situations, and learn to trust myself. The more I trust myself and am comfortable with the trade-off of “zero,” the more likely I am to take the risky bet.
Asymmetric Bets
So now that we’ve addressed the risk level you’re willing to stomach, I want to talk a bit about the type of bets you should make too. I’ve learned to prioritize asymmetric bets — let’s talk about what that means.
I’m a big fan of the first google definition:
“An asymmetric bet is when the potential upside of a position is much greater than its potential downside. If you risk $1,000 for the chance of making $10,000, you make an asymmetrical bet. If you risk $1,000 for the chance of making $1,000, you make a symmetrical bet.”
The reason I bring this up is because of its relevance to risky decision-making in life and investing. For me, there’s a direct balance of asymmetry and risk with every decision. The more asymmetric the bet is, the more willing I am to make the riskier bet. The EV of every option comes into play here. Let’s say I purchase an asset for $2,000 with the expected potential of reaching a value of $5,000. If this asset drops to $1,000, would you rather cut your losses or hold through?
Assuming no other variables, I’d probably hold through the unrealized loss because my maximum is limited to $2,000 total, where the asset could potentially make an asymmetric run upwards.
Similarly, in my personal and professional endeavors, I’m willing to take the bets that have asymmetric upward runs over purely optimizing for comfort. If you’ve chatted with me recently, I like to state that there are non-zero chances that something good may happen, especially when there’s not much downside. Cold-emailing the CEO of that company you’re recruiting for: there’s not much downside and a non-zero chance of getting a response. What is stopping you?
With my travels, although there is a non-zero chance of me getting kidnapped and robbed, the upside of me meeting new people, experiencing new cultures, and trying new foods is asymmetrical to the downside.
I think there’s a lot more for me to speak on in regards to asymmetric bets, but my little brother wants to go home and I think this is a good stopping point. My final question to you is: what asymmetric bets are you missing out on? Are you betting on yourself enough or are you falling into the trap of staying comfortable?
Sorry, that’s two questions. But both are good to ask. Until next time I feel like writing,
CL
my bad, got tired staying at the boba place