Volatility, Competition, and Investments

In collaboration with Alexandra Piechowicz and Nicholas Sanders

The possibility of failure deters many individuals from investing time or money into something, in particular when the probability of an attractive return is low or the projected revenue is truly uncertain. For example, a rational individual would not pay $50,000 for a lottery ticket if his or her chances of winning $75,000 were one-in-a-million. Risking $50,000 is likely not worthwhile when the potential return on his or her investment is only 50 percent and the likelihood of losing the investment is almost inescapable. Here, the expected benefit (multiplying the probability of success by the $75,000) is $37,500, whereas the cost ...

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