Red-Blooded Risk: The Secret History of Wall Street

Bets

Rocket scientists asked two more questions that occur immediately to anyone making an actual bet. Who are you betting with, and who is doing the betting? For the first question, are you going to name the same price for the Martian-life security when betting with a loudmouth idiot in a bar as with a scientific expert—or with a little green man from a flying saucer who lands in your back yard? If the other person knows less than you, you will set the price somewhere between what you think and what you think he thinks, in order to maximize your expected profit. If the other bettor knows more than you, you'll set the price at what you think he thinks, in order to minimize your expected loss. Traditional theorists usually have you betting with yourself, which is entirely pointless.

From a frequentist point of view, suppose someone tells you he rejects the hypothesis that it will snow in New York City tomorrow at the 5 percent level. He can say this every day with perfect accuracy, since it snows in New York City on fewer than 5 percent of days. But the statement is useless for practical decision making. Some days have essentially zero chance of snow; on other days snow is virtually certain. You could make money betting on this probability only if you are betting against an idiot, perhaps someone who thinks New York City is in Australia. If someone can make money predicting snowfall accepting odds set by the National Oceanic and Atmospheric Administration's National Weather Service, ...