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Asymmetric Bets

// status: draft

You gotta have money to make money

This is the type of line that pessimists love to declare, but it's more fun when framed as a question:

After I save some money, how can I change my strategy to make more of it?

One answer is to make as many asymmetric bets as possible. I think about it like this:

expected_return = (p * v) - c \ p = probability of success \ v = potential value, if successful \ c = total cost of the investment

  • As p goes down, v - c must increase disproportionately (this is why it's called "asymmetric").
  • Make a lot of these bets

This strategy is everywhere. Consider, for a moment, the miracle of human reproduction. The average man creates 525 billion sperm during his lifetime, and yet only 1.35 children. This fundamental process, which results in the exponential growth of the human species, is successful 0.000000000257% of the time.

expected_value = (.00000000000257 * 1 human_life) - ~0

It costs almost nothing to create sperm, and the potential value of a human life is very high. If you take this bet 525 billion times, you expect 1.35 human lives. This is a very asymmetric bet, and it’s only reliable when repeated 100s of billions of times.

For a more useful example, consider Calvin. He's an IT employee in the year 2014. He decides to invest $500 in 52 different start-ups (1 investment every weekend for a year).

Calvin is wrong 98.2% of the time. He loses all the money on 51 of these investments. For years, his middle-class friends mock him for being stupid as they go home to click through terrible web interfaces to optimize their credit card points.

But, the other investment was the Ethereum ICO, and Calvin made $4 million.

This example was contrived, but it’s not farfetched. I knew some Calvins, and I’ve tried to copy them. Unfortunately, I tend to sell the winners too early, so I miss out on some upside.

It's difficult to combine this spray-and-pray investment mentality with the iron will to hold through storms. I'm getting better at this, but not because I’m smarter or more disciplined. It's because I have more money, which lowers the stakes of failure.

You gotta have money to make money

\ \ \ \ \ \ \ \ \ /\ Note -- Don’t over-apply this strategy, or you’ll have a shallow life. I spend most of my time on long-term projects with slow starts, but those aren’t strictly focused on financial returns.\ /