Hypothetical Gambling Situation

[AdamL]

You knew this, because you ruled it out in your original post, but normally 5k in the hand is worth more than 50% of 10k *even* if you have a strangely shaped utility function (as you've described.) The reason of course is that the 5k has the ability to make money, even if nothing more than simple interest. You have two options which each have equal EV, but only one of them is guaranteed to be "playable".

Any surefire permanent addition to your roll is worth more than a 50% neutral EV shot at the same thing. There is no opportunity cost to keeping the 5k.

I hope that makes sense. "Well, if you had 10k you'd have twice as much opportunity to collect interest". True, but if you lose you'd have zero interest.

Given that interest and other bankroll-related activities are *compound* activities, a 100% 5000 is worth more than a 50% 10,000. The loss in compounded interest when you lose the double out-weighs the extra interest you'd have with 10k.

5k at 10% interest = 5500 ev, plus guaranteed compound interest.

50% x 10k at 10% interest = 5500 ev, but when you lose, you cost yourself in time-interset accumulation.


This is very similar to my suggestion that there are real costs to downswings, if they prevent you from doing things in real life which would make you money or prevent you from spending it on unprofitable outcomes.

If you rent for an extra 6 months due to a downswing in a booming real estate market, you lose a lot more than you would have if you had an upswing or stuck near EV. The "Sklansky Bucks" may be equal, but the real dollars won or lost are far from equal.

Likewise, if some individual were planning on buying a big money-pit, pain-in-the-ass, somewhat uneccessary, depreciating asset if they had an upswing, then they would actually prefer from a utility standpoint to NOT have an upswing. The upswing has "excess baggage" beyond the neutrality of the sklansky bucks that the individual shouldn't, from a strictly financial standpoint, wish to incur.

Of course, some people just want to have their toys. *COUGH*. [img]/images/graemlins/laugh.gif[/img] [img]/images/graemlins/laugh.gif[/img] [img]/images/graemlins/wink.gif[/img]