I haven’t ever bet money on the outcome of a game but I am constantly making bets with myself. All the time. What will be the outcome of this election? Which road is a better choice at this time of day? Will I get my white daps dirty if I wear them on what appears to be a sunny Welsh day? (answer: almost definitely)
I love risk. It is fun and it is scary which are the components of A Good Time™.
Reading ALLISON SHRAGER’s book An Economist Walks Into a Brothel was very much A Good Time™.
SHRAGER claims to have pretty much failed at academia and accidentally become involved with a Nobel prize winner in studying retirement and how people save for it. It turns out: you’re probably not very good at preparing for retirement.
Her argument is mainly that you’re likely to be misunderstanding risk and either over or under compensating. This, she claims, is pretty much down to the fact that you’re unlikely to know what you’re aiming for, really. And even if you do, you’re probably doing the maths wrong.
Cool news: our twilight years are going to be lean. Especially if you’re in my generation.
This book was particularly interesting because it features:
The risk-reward factors of working illegally in the sex trade versus in a regulated brothel
Hollywood’s experiment with data-driven film financing (spoiler: it’s not great)
Racehorse breeding. This passage reminded me of the Hunter S. Thompson essay 'The Kentucky Derby is Decadent and Depraved’
My generation is going to have a cold retirement. That’s OK though, because I’ll find a way to monetise my thoughts and become a bazillionaire.
See you soon,
Marc
P.S. A Good Time™ is a registered trademark of Positive Hüman Corp. lol.
P.P.S. My main strategy for retirement is actually to sue anyone who uses the phrase A Good Time™ without properly attributing it to Positive Hüman Corp. Twitter says I’m going to be rich. Google says this will be a growth area for my retirement strategy as unattributed use of A Good Time™ has risen consistently since 2004.
P.P.P.S This got wyrd.
Snippets
Duh:
To put it in terms of financial economics: if you need to decide between two portfolios with similar returns, choose the one that is less risky.
Good point
In most areas of economics, value is based on scarcity. It doesn’t work quite the same way in financial economics. Financial economics assumes risk is also a critical component of value. Goods that lessen risk tend to cost more. This critical piece of information can revolutionize the way you assess everyday decisions and help you make better, more informed choices.
This definitely changed the way that I think about risk
the single most effective way to increase the odds that risk taking will pay off is fairly simple: define what risk and reward mean to you. The biggest mistake people make when they take a risk is not having a well-defined goal.
I like how relatable economics can be sometimes. My friend always says ‘The grass may be greener on the other side but you still have to mow the lawn.’
We all have days when we want to quit our jobs, ditch our relationships, and start fresh. Most of us know people who’ve done this, and more often than not, the gamble did not pay off. They still faced the same job and relationship issues they did before. In order to have a better job, we need to know what we want from our career. In order to have a better relationship, we need to be clear about what we are looking for in a partner.
This sounds like a pitch to the Hollywood film financiers:
The risk-free option is whatever delivers what you want with total certainty. If you are deciding what to do tonight and your objective is a pleasant evening, risk-free could be staying in and watching Netflix on the couch because you know how that will turn out. Risky is going out. Anything could happen: you might meet the love of your life or get hit by a car.
Catching an atom right out of the air:
Notice the long tail on the right, which covers the range of potential positive profits. A movie in this range could barely break even or return more than 1000 percent, or anything in between. All the profitable scenarios are equally unlikely. The odds are a movie will lose money because most are clustered in the smaller, loss part of the curve. Fifty-three percent of movies shown don’t earn back production budgets at the box office, and that’s assuming they are shown in many theaters (most movies aren’t). And even if they do make a profit at the box office, their earning potential looks like a complete crapshoot with only a few big winners.
I absolutely love how crass startup guys can get.
The Excel spreadsheet contained the Holy Grail data and transformed it into something even more elusive and desirable: reliable risk estimates that the hedge funds and banks needed to green-light investment. They plowed hundreds of millions of dollars into the movies Kavanaugh picked. In 2005 and 2006, he financed thirty-six movies with Universal and Sony and made money for his investors. Hedge fund investors earned a $150 million profit on one of his early slates, a return of between 13 percent and 18 percent. Kavanaugh was paid millions of dollars per movie and got a producer credit despite having no role in production. But then Kavanaugh got greedy. Elliott Management, a $21 billion hedge fund, paid $67 million for 49.5 percent of Relativity in 2008. This gave Kavanaugh access to the money he needed to start investing in movies himself. His spending got out of control: his private bathroom had toilet paper with an image of President Obama on it; he brought exotic animals into the office; and he started to work out of a lavishly decorated airport hangar. Even worse, his magic model stopped working, selecting bombs like The Warrior’s Way, which cost $42 million to make and brought in $5.7 million in the United States, and Machine Gun Preacher, with U.S. earnings of only $539,000. Elliott Management pulled out in 2010. Kavanaugh managed to find more financial backers, but he continued to struggle as his spending accelerated and he picked more duds. Relativity was bankrupt by 2016. Once again, Hollywood broke a risk model.
I am going to apply this model to my working week and work less than 1 in 3 days. This is sure to make me a lot of moolah:
Hellmuth tells me that he knows the key to good play is patience and control, but his interpretation of this is different from what you might expect. He explains a highly disciplined style of play to me: “Playing good poker means only playing 12 percent of your hands. You can’t make money if you play more than 30 percent, and if you play 100 percent you’ll go broke every day.”
Northern Dancer had to win a lot of races to keep up his childcare payments, amiright?!
Possibly the most prolific modern racehorse was Northern Dancer, who was a Kentucky Derby and Preakness winner. Northern Dancer’s stud career lasted more than twenty years and spanned multiple continents, producing many progeny who also had exceptional racing careers. At its peak in 1984, his stud fee was $500,000, more than $1.2 million in 2018 dollars, six years before his death in 1990. But he lives on. Today, almost every single Thoroughbred is related to Northern Dancer, often on both their mother’s and father’s sides, multiple times. According to David Dink, a Kentucky-based writer who has spent his career studying Thoroughbred bloodlines, Northern Dancer was present in the bloodlines of 96.5 percent of the 38,821 foals sold between 2012 and 2015. Dink says Northern Dancer was present two to three times in the lineage of 64 percent of the horses. He was present four times or more in 20 percent of the foals.