Love this! One's bankroll management technique should include this "practical expected value" based on the trustworthiness of the entity you're betting against. My personal lesson on this was that in 2013 I bet notorious climate science denier Pat Michaels $250 (an amount he mocked as being almost too small to bother with) that we would have statistically significant warming (at the 95% confidence level) in the HadCRUTx data for the 25 year period starting in 1997.
I won, of course, and Pat was supposed to donate the $250 to the Climate Science Legal Defense Fund. I never got word that he paid. I did manage to contact a secretary of his who was quite rude when she told me that she did pass my message along to him, and that she would not respond to me further. So I think he welched.
Apart from the trustworthiness of the counterparty, "practical expected value" also needs to factor in that the mathematical definition of expected value assumes an indefinite (theoretically infinite) time horizon. There is a difference between accrued expected value and realized expected value.
Think about it this way. Accountants keep track of money owed as accounts receivable, which are accounted for as assets. Accounts payable is money owed to others and are treated as liabilities. But in practice there's a difference between accounts receivable and accounts received (i.e., actually getting paid); and similarly for accounts payable and accounts paid.
We have the same concept in expected value. Think of "accrued expected value" as the total of expected value of all bets/investments made, and "realized expected value" as the total realized profits on bets/investments. The difference between these creates "EV receivable" (if realized profits are less than accrued EV) or "EV payable" (if accrued EV is less than realized profit). In theory, EV receivable is an asset, EV payable is a liability. But in practice, just like accounts receivable need to be collected in order to realized, EV receivable must actually be realized in order to reflect real profit. And one of the requirements that it be realized is that you stay in the game long enough.
To summarize: accounts receivable aren't really assets unless they have a reasonable expectation of being received. And accrued EV doesn't get realized unless you can play for a sufficiently long time horizon.
Love this! One's bankroll management technique should include this "practical expected value" based on the trustworthiness of the entity you're betting against. My personal lesson on this was that in 2013 I bet notorious climate science denier Pat Michaels $250 (an amount he mocked as being almost too small to bother with) that we would have statistically significant warming (at the 95% confidence level) in the HadCRUTx data for the 25 year period starting in 1997.
https://www.drroyspencer.com/2013/09/pat-michaels-bets-on-25-years-of-no-warming/
I won, of course, and Pat was supposed to donate the $250 to the Climate Science Legal Defense Fund. I never got word that he paid. I did manage to contact a secretary of his who was quite rude when she told me that she did pass my message along to him, and that she would not respond to me further. So I think he welched.
And then he died.
So long, asshole.
https://www.nytimes.com/2022/07/22/climate/patrick-j-michaels-dead.html
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SS
Great story, Scott.
Apart from the trustworthiness of the counterparty, "practical expected value" also needs to factor in that the mathematical definition of expected value assumes an indefinite (theoretically infinite) time horizon. There is a difference between accrued expected value and realized expected value.
Think about it this way. Accountants keep track of money owed as accounts receivable, which are accounted for as assets. Accounts payable is money owed to others and are treated as liabilities. But in practice there's a difference between accounts receivable and accounts received (i.e., actually getting paid); and similarly for accounts payable and accounts paid.
We have the same concept in expected value. Think of "accrued expected value" as the total of expected value of all bets/investments made, and "realized expected value" as the total realized profits on bets/investments. The difference between these creates "EV receivable" (if realized profits are less than accrued EV) or "EV payable" (if accrued EV is less than realized profit). In theory, EV receivable is an asset, EV payable is a liability. But in practice, just like accounts receivable need to be collected in order to realized, EV receivable must actually be realized in order to reflect real profit. And one of the requirements that it be realized is that you stay in the game long enough.
To summarize: accounts receivable aren't really assets unless they have a reasonable expectation of being received. And accrued EV doesn't get realized unless you can play for a sufficiently long time horizon.