The highest expected value strategy in investing is to put all your money in the single investment that itself has the highest expected value (assuming the opportunity is large enough that your whole contribution doesn’t push the project very far down its marginal utility curve so the last dollar invested will have lower return on investment than some other investment).
I wanted to comment on this example: the benefits to index funds are more than in variance. Trading costs make it a superior long-term strategy to managed funds / researching your own stock picks (the highest expected value investment will change from moment to moment), and the fact that stock prices are not independent means a well-chosen larger subset of stocks will have higher expected value than a poorly-chosen smaller subset of stocks.
To reword that last sentence (and explain what I mean by well-chosen and poorly chosen): if I sort stocks by expected return over the next month and pick the top five, my expected value is worse than or the same as if I also model the effect stock prices have on other stocks, and then pick the set of five stocks whose expected return over the next month is highest, even though I have access to the same set of stocks.
That is to say, the EV of a single stock being highest is due to the rudimentary nature of that EV. You can improve the EV without discarding that method of analysis, and without touching on utility concerns (where risk of ruin comes into play in a big way).
I agree with you that irreversibility should raise giant red flags and suggest that an EU (or however you want to abbreviate expected utility) calculation is a better choice than an EV calculation, and plans which are reversible significantly decrease the risk of ruin. But I think Bella’s overall risk of ruin decreased with the transition to a vampire (and then massively increased with the transition to a revolutionary), and she had good reason to expect that would be the case.
That is interesting to think about, though, the optimal way to manage a transition like that- hmm.
I wanted to comment on this example: the benefits to index funds are more than in variance. Trading costs make it a superior long-term strategy to managed funds / researching your own stock picks (the highest expected value investment will change from moment to moment), and the fact that stock prices are not independent means a well-chosen larger subset of stocks will have higher expected value than a poorly-chosen smaller subset of stocks.
To reword that last sentence (and explain what I mean by well-chosen and poorly chosen): if I sort stocks by expected return over the next month and pick the top five, my expected value is worse than or the same as if I also model the effect stock prices have on other stocks, and then pick the set of five stocks whose expected return over the next month is highest, even though I have access to the same set of stocks.
That is to say, the EV of a single stock being highest is due to the rudimentary nature of that EV. You can improve the EV without discarding that method of analysis, and without touching on utility concerns (where risk of ruin comes into play in a big way).
I agree with you that irreversibility should raise giant red flags and suggest that an EU (or however you want to abbreviate expected utility) calculation is a better choice than an EV calculation, and plans which are reversible significantly decrease the risk of ruin. But I think Bella’s overall risk of ruin decreased with the transition to a vampire (and then massively increased with the transition to a revolutionary), and she had good reason to expect that would be the case.
That is interesting to think about, though, the optimal way to manage a transition like that- hmm.