Which would you choose?

[Ima saver]

Re: Which would you choose?

It looks like we all think alike!!

[Ima saver]

Re: Which would you choose?

opps, I hit the wrong smiley, supposed to be giving an approval sign.

[Haku]

Re: Which would you choose?

Is there an actual "answer" to this question?

I gave some more thought to this deceptively simple but fascinating question of 100% chance of 25k vs. 50% chance of 100k. Statistics would tell us that, over the course of enough trials, taking the 50% risk for 100k would be twice as rewarding as it would be to play it safe.

For the sake of example, let's say that 4 friends decide to band together, promising that whatever they earn collectively, they would split equally. Now, let's start with the playing it safe strategy. That means they're all going to go home with 25k each.

However, if they all choose to risk for 100k, statistically, 2 out of those 4 friends will win 100k. They then divide the winnings and each would then go home with 50k.

Of course, 4 trials is extremely low so the results can vary drastically. However, the more trials are applied, the more the sampling will even out. When that happens, it definitely pays to risk it all.

Alternatively, smaller groups can "diversify" to compromise between risk and gain. For example, half agree to risk it all while the other half agree to play it safe. In that same example of 4 friends, 2 of them play it safe and bring in 50k, while the other two risk it all. Given the 50% of success, let's say one of them wins and brings an additional 100k, bringing the total to 150k. Divide that by 4, and you have 37.5k of winning each.

Hmm. Actually, if this was a group strategy, I would have everybody risk it all. Diversifying makes sense in many scenarios, but not in this case.

Taking all this in, I'm going to revise my answer and mirror jmjj's response. If it's a scenario on winning, I would risk it, but in the scenario of taking a loss, I would play it safe. But then, we are talking about comparing an all gain, no loss scenario versus an all loss, no gain scenario.

Now, if group strategies were somehow forbidden, then I would say it's up to individual preferences.

Finally, if there is an "answer" to this, or any other insights, please share it already! I must know!

[PRICEPLUS]

Re: Which would you choose?

25000 of certainty is better than 100000 of uncertainty. Just my .02 cents.

[sweeps]

Re: Which would you choose?

There's no "right" answer. It all depends on your risk tolerance. But one interesting thing that crops up with this pair of questions is that people are much more willing to take on extra risk to avoid a loss than they would to realize a gain.

I played with the numbers a bit because I know this is a particularly risk-averse audience. But in a classic situation, you're given the following 2 scenarios :

1. You have a choice between (a) a guaranteed WIN of $100,000 or (b) a 10% chance of winning $1,000,000. Which would you choose?
2. You have a choice between (a) a guaranteed LOSS of $100,000 or (b) a 10% chance of losing $1,000,000 (in other words, a 90% chance of losing nothing). Which would you choose?

In #1, most people will choose a. In #2, most people will choose b. This is irrational, but it happens because of an overwhelming aversion to loss. Successful investors (and poker players by the way) learn to overcome this instinct.

EDIT: By the way, you can adjust the numbers to make it more realistic for your own situation... for example, a guaranteed $1,000 vs. 10% chance at $10,000, etc.

[sweeps]

Re: Which would you choose?

By the way, you can adjust the numbers to make it something that would seem more realistic for your own situation... for example, a guaranteed $1,000 vs. 10% chance at $10,000, etc.

[Haku]

Re: Which would you choose?

Ah, thanks for the explanation, sweeps.

I admit I am on the bearish side as well, but I do try to be rational and look at the numbers first. If the odds are good enough, I'll play it! Wouldn't make sense not to.

In your classic scenario though, I would have chosen A for both, but only because the numbers doesn't show any incentive to risk it. Individual risk is too high, and group strategy would only break even.