Regarding bettting, one way of handling the issue of diminishing marginal returns for money is to use bets that are small compared to your net worth. When the bet size is small, the ratio of utility should be close to linear. This doesn’t work perfectly, but it does help reduce the problem some what. Of course, this only works for issues where the expected probability is not extreme (by the time one gets to more than 10 to 1 this starts to break down).
This doesn’t work great even if you deal with moderate probabilities, because you need high fractions of net worth to get people to stop signaling...if I am a Yankees fan who earns $50,000 a year, I will bet $10 at even odds that the Yankees will win even if my available data would only predict a 40% chance for the Yankees to win. The expected loss of $1 doesn’t even come close to the expected loss of appearing not to love the pinstriped sluggers with all my heart.
This doesn’t work great even if you deal with moderate probabilities, because you need high fractions of net worth to get people to stop signaling...
Yes, and there’s also the issue of transaction costs. Especially since transaction costs are basically the opportunity costs of the time spent arranging the bet and the payment, and for people with higher net worth, these opportunity costs are typically also higher.
Regarding bettting, one way of handling the issue of diminishing marginal returns for money is to use bets that are small compared to your net worth. When the bet size is small, the ratio of utility should be close to linear. This doesn’t work perfectly, but it does help reduce the problem some what. Of course, this only works for issues where the expected probability is not extreme (by the time one gets to more than 10 to 1 this starts to break down).
This doesn’t work great even if you deal with moderate probabilities, because you need high fractions of net worth to get people to stop signaling...if I am a Yankees fan who earns $50,000 a year, I will bet $10 at even odds that the Yankees will win even if my available data would only predict a 40% chance for the Yankees to win. The expected loss of $1 doesn’t even come close to the expected loss of appearing not to love the pinstriped sluggers with all my heart.
Mass_Driver:
Yes, and there’s also the issue of transaction costs. Especially since transaction costs are basically the opportunity costs of the time spent arranging the bet and the payment, and for people with higher net worth, these opportunity costs are typically also higher.