Good insurance. Paying a fair amount of money to hedge against rare but potentially ruinous events - like your house burning down - is obviously a good strategy. The trick with insurance is finding the sweet spot between paying too much for cover you don't need or too little and being exposed to gaps in your cover. Lately I've been increasing all my excess values to bring down premiums, because I can afford to pay a high excess and it's unlikely I'll need to.
Ask HN: What are examples of activities/bets with asymmetric upside?
51–60 of 100 posts
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#52The lottery. Honestly it bugs me a bit that I don't know the right way to model it - because so often people will slate it for having a terrible expected return (E[X]), but.. some very high percentage of us here could play every single week without noticing it (negligible downside), and yet winning however slim the chance would be somewhat life changing - even if it wouldn't make you quit work it'd be a nice windfall…
The lottery seems like a really dumb thing.
Compare it to something like voting. There's a vanishingly small chance that your personal vote is going to sway any issue. The benefits of voting are only felt at a societal level rather than a personal one.
Lotto also has societal benefits, like funding schools and keeping organized crime out of the casual gambling market. Plus it's fun, on the order of, say, eating a mini bag of Doritos while you're stuck for three hours in a train station (but without the calories).
So why does the "I know math" crowd deplore the lottery but not voting? I'm guessing the real answer is that one is looked at as a low-class activity and one a high-class activity.
Edit: Just to be clear, my point isn't that voting is bad, it's that lotto isn't a pure math problem.
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#53Earlier quoted context omitted.
Opportunity costs make the lottery a poor option. If you could only invest money in the lottery and nothing else, sure, it's better than no chance of multiplying your income. But if you invest in an index fund, there's a very high chance of getting a 15-30% return on investment, versus a near-guaranteed amount of just losing the money spent on the lottery. It may not seem like a lot each ticket, but the costs add up…
A 30% return on the amount spent on tickets would not improve quality of life drastically for most people. Winning a big jackpot would. That creates a situation in which expected value might not be the best metric. Measuring it in expected quality of life, for example, would favor playing for many people including likely most reading this.
Quality of life is an interesting frame, though through that lens, some research tends to show that many (but not all) lottery winners actually are worse off in terms of life quality after winning.
From The Washington Post [1] (the links to the source studies are unfortunately broken): "When a team of economists tracked the fortunes of financially distressed people in Florida who had won the lottery, they found that within three to five years, the winners of big prizes (between $50,000 and $150,000) were equally likely to have filed for bankruptcy as the small winners, and the groups had similarly low savings and levels of debt. According to the National Endowment for Financial Education, about 70 percent of people who win a lottery or receive a large windfall go bankrupt within a few years."
However, I concede that if you win the lottery and spend it wisely (e.g. maybe invest virtually all of it and live off the interest spent reasonably), it's plausible it can greatly improve quality of life. So, assuming one acts carefully when receiving the large windfall, I agree with you now that buying lottery tickets is plausibly a good idea.
[1] https://www.washingtonpost.com/outlook/five-myths/five-myths...
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#54Running a casino
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#55Starting a side hustle business? For "$10k" work of effort it could lead to many times that in revenue in the future.
I would add to this, a side hustle business where you learn something new. Even if the business fails that knowledge will often be invaluable in future jobs, projects etc. Plus it can really help with feeling unmotivated and stuck in life.
> "Plus it can really help with feeling unmotivated and stuck in life."
This is a great perspective. Having a strong side interest gave me a lot of happiness in times where I was set up for a lot of difficult, repetitive work over a significant stretch of time.
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#56The lottery. Honestly it bugs me a bit that I don't know the right way to model it - because so often people will slate it for having a terrible expected return (E[X]), but.. some very high percentage of us here could play every single week without noticing it (negligible downside), and yet winning however slim the chance would be somewhat life changing - even if it wouldn't make you quit work it'd be a nice windfall…
I throw ~ $10 a fortnight at the State Lottery with zero expectation of winning (ie. lower than the formal E() chance of winning) > We're extremely fortunate in Western Australia to have the only lottery in the nation, and one of the few in the world, where all profits are returned back to the community. In the past year they've taken in a #billion and put out some $323 million in community grants and the rest in pri…
The lottery just an optional tax on people who either like to dream ... or are bad at math :).
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#57Earlier quoted context omitted.
Where’s the huge upside though? You need a roof over your head so if your property goes up 10%, so has every property you’re likely to want to move to when it comes time to sell. You only really benefit if you’re investing outside of your primary residence. What’s more, the risk is huge. In the AMD example, you could lose 100% of your investment. Get things wrong with a house and you’re going to be out way more than…
It’s an asset you buy with 20x leverage with up-only price action supported by government intervention. That’s huge upside.
> That’s huge upside.
That’s a big gamble. I thought this was about asymmetric upsides but here there’s a pretty huge downside.
Firstly, how do you realise the gain when you need somewhere to live? Primary residence != investment.
Secondly, 20x leverage shouldn’t be a selling point. A tiny dip in prices leaves you in negative equity and unable to move home. Less of an investment and more of a prison.
95% LTV mortgages tend to come with well above average rates to match the level of risk too. The gamble isn’t cheap.
Property can be a great investment but people are confusing buying a home with investing in property. They aren’t the same thing.
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#58Buying a house in the United States. For as little as 5% down, and low-single-digit-fixed rates over a 30-year term, you can purchase an asset worth hundreds of thousands of dollars and you get to keep all the upside if its value goes up (which is historically quite likely, especially since housing policy in the U.S. deliberately keeps supply low). It's insane leverage, an excellent inflation hedge, and you get to de…
Leverage works both ways.
Put $100k down on a $500k home. House drops 20% and you now have a 100% loss of your investment.
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#59> Investing in call options on AMD in 2014 or Tesla in 2019 also had huge asymmetric upside. It was clear that these stocks had massive risks, but while the upside was potentially huge, the downside was capped at -100%.
This is unactionable advice. Call options on any stock are capped at -100%. It's choosing which ones are worth that risk that is the hard part.
Re: Ask HN: What are examples of activities/bets with asymmetric upside?
#60Earlier quoted context omitted.
It’s an asset you buy with 20x leverage with up-only price action supported by government intervention. That’s huge upside.
> That’s huge upside. That’s a big gamble. I thought this was about asymmetric upsides but here there’s a pretty huge downside. Firstly, how do you realise the gain when you need somewhere to live? Primary residence != investment. Secondly, 20x leverage shouldn’t be a selling point. A tiny dip in prices leaves you in negative equity and unable to move home. Less of an investment and more of a prison. 95% LTV mortgage…
Your own argument is that you need a roof over your head, either way, so if the value doesn't increase, then you simply live there. If it does, then you keep all the profit, tax free.