## Bah — Finance Majors

Or — as we call them around here — *idjits*.

I mean, how else can you explain the fact that when presented with a game rigged in their favor and offered the chance to bet *real money* repeatedly playing the game … in any amount they choose … as many times as they could play in 30 minutes

*A full third of them lost money! More than a quarter of them went broke! Some of the test subjects were making a living working in investment firms!
*

Idiots, I say.

* Certainly* not gamers.

** Definitely** not gamers with a background in engineering or math.

Of the 61 subjects, 18 subjects bet their entire bankroll on one flip, which increased the probability of ruin from close to 0% using [the optimal strategy] to 40% if their all-in flip was on heads, or 60% if they bet it all on tails,

which amazingly some of them did.

Read the full paper (Rational Decision-Making under Uncertainty: Observed Betting Patterns on a Biased Coin) then consider where your retirement savings are.

(Mine are in index funds).

I am alarmed that these people were told that the coin came up 60% heads, and some of them bet on tails. REPEATEDLY.

Frederic BushNovember 5, 2016 at 8:19 am

I say again — BAH!

In defense of her people, Mrs. Tao (a finance major) did not bet on tails, nor did she risk it all on one bet. After she understood the problem she went with small repeated bets on heads. A bit too small, but even I didn’t know the optimal strategy until I was reminded of the Kelly Criteria.

More internationally, the TaoLing originally bet $15 (on heads) on his first flip, but then after I asked what he would do if the first coin was tails, he decided that $5 (on heads) was more prudent for a first bet.

taogamingNovember 5, 2016 at 2:15 pm

Before reading about the optimal strategy, I decided I would bet 25% of my stake each time on heads. Not quite optimal, but not too bad either.

Eric BrosiusNovember 5, 2016 at 6:36 pm

That’s better than I did. I kicked myself when the paper mentioned the optimal strategy. I’d encountered it before, but forgotten.

taogamingNovember 5, 2016 at 9:23 pm

I forgot the Kelly math and I would’ve gone with 10%, which turns out to be fine with the cap.

Frederic BushNovember 6, 2016 at 8:51 am