Setting aside the whole stealing your client's money thing, which has been covered by other commenters, one of the lessons of the FTX/Alameda Trading blowup is maximizing your gains while minimizing the risk of gamblers ruin.
First up, some of the armchair psychoanalysis based off of FTX investor Sequoia Capital's fluffer piece "Sam Bankman-Fried Has a Savior Complex—And Maybe You Should Too":
there’s a direct causal link between SBF’s effective altruism & his propensity to make irresponsible investment decisions
— πͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺ (@SHL0MS) November 11, 2022
the hubris & savior complex here is mind boggling, even more so bc a supposed effective altruist didn’t account for the collateral damage if his bets fail https://t.co/XkfcQfu8Kk
so Sam in his infinite wisdom decides he has a linear utility function since he is predestined to be the planetary savior, which of course exponentially increases his likelihood of blowing up the portfolio because his bets are way outsized relative to the potential returns
— πͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺ (@SHL0MS) November 11, 2022
....MUCH MORE (thread)
And the money quote that comes from assuming Bankman-Fried and Ellison had pure motives:
— πͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺπͺ (@SHL0MS) November 11, 2022
Now, for our non-narcisstic-sociopath readers, a look or two at the Kelly Criterion. From 2008
Markets, Risk and Gambler's Ruin
From the Wall Street Journal:
Old Pros Size Up the Game
Thorp and Pimco's Gross Open Up on Dangers
Of Over-Betting, How to Play the Bond Market...MORE
From 2011:
Dreamtime Finance (and the Kelly Criterion)
I've been meaning to write about Kelly for a couple years and keep forgetting. Today I forget no more.
In probability theory the Kelly Criterion is a bet sizing technique used when the player has a quantifiable edge.
(When there is no edge the optimal bet size is $0.00)
The criterion will deliver the fastest growth rate balanced by reduced risk of ruin.
You can grow your pile faster but you increase the risk of ending up broke should you, for example bet 100% of your net worth in a situation where you have anything less than a 100% chance of winning.
The criterion says bet roughly your advantage as a percentage of your current bankroll divided by the variance of the game/market/sports book etc..
Variance is the standard deviation of the game squared. In blackjack the s.d. is 1.15 so the square is 1.3225.
As blackjack is played in the U.S. the most a card counter can hope for is a 1/2% to 1% average advantage with much of that average accruing from the fact that you can get up from a negative table.
Divide by 1.3225 and you've got your bet size.
It's a tough way to grind out a living but hopefully this exercise will stop you from pulling a Leeson, betting all of Barings money and destroying the 233 year old bank....
....MUCH MORE
In casino gambling it is the ultimate idle fantasy that one will find a game where the house miscalculate the payouts and offers up a positive expectation game to the customer. I found one once, a side bet in blackjack that was set up with a ~3% advantage to the player. Unfortunately the two limiting factors, a) number of resolved hands per hour—around 60 at a full table and b) a maximum bet limit of $25 dollars on the side bet meant that your expected win rate was $25 x 60 x 3% = $45 dollars per hour. Not exactly a get rich quick scheme but an amusing way to pass a couple hours.
I think of that evening when I see people talk about someone or something being on the wrong side of the market and attempt to calculate the odds the house is giving up and the optimal bet sizing to accelerate the accumulation of loot while minimizing the risk of gamblers ruin (the Kelly Criterion, see after the jump).
And then I wake up from my reverie.
From Neue ZΓΌrcher Zeitung's The Market.ch....
And some of the math:
Finally, another rule of life:
Cassandra's (Not so) Golden Rules About Investing (And Not Investing)
#21. NEVER
double-down (except when you have material non-public information and
deep pockets) or if you're Ed Thorp, or if you're playing at The
Martingale Room.
Don't double down, double up.
