Methodology I Want to Apply

Hi, I am very glad that you are here to read my article 🙂

First of all I think that I should point out that I prefer quantitative methodology due to my education. I always try to behave as rational as possible to avoid extra costs and in order not to miss chances.

Recently I came across a video of the MIT explaining the basics of finance. The lecturer brought a very good example to the class:

” Choice A: 80% chance to lose $500, 20% chance to win $500″

the calculation is done pretty fast:

the expected win is 0,20x$500=$100

the expected loss is 0,80x$500=$400

The overall expectation can be described as $100-$400=-$300

It is clearly a not-favorable gamble!

Let’s consider Choice B

“Choice B: 100% chance to lose $280”

This is pretty easy: expected loss 1x$280=$280 you are going to lose anyway.

Now imagine that you are forced to decide between choice A and B. You have the chance to sell your stocks and accept the loss of $280, but you can also gamble and try to get $500 from choice A, while only running the risk of losing $20 more than in choice B. After evaluating the expectation you will recognise that the expected costs for choice B is $20 lower. Hence, the difference of losses does not look big, many people would prefer choice A in order to have chances to still get some money by luck.

 

How would you decide and why?

Would you decribe yourself as a Risk avers, neutral or as a person who is willing to take risks?

Do you always do your calculation rather than jumping on something without calculating and trust your feelings?

Published by chess

2000 rated hobby player and coach writing about chess

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