At what level of payoff is that bet worth it? Lets say the bet is a 50⁄50 triple-or-nothing bet. So, either EA ends up with half its money, or ends up with double. I’d guess (based on not much) that right now losing 50% of EA’s money is more negative than doubling EA’s money is positive.
There is an actual correct answer, at least the abstract. According to the Kelly criterion, on a 50⁄50 triple-or-nothing bet, you should put down 25% of your bankroll.
Say EA is now at around 50⁄50 Crypto/non-Crypto, what kind of returns would justify that allocation? At 50⁄50 odds, there’s actually no multiple that makes the math work out.
But that’s just for the strict case we’re discussing. See the section on “Investment formula” for what to do about partial losses.
Finally, instead of a 50⁄50 triple-or-nothing bet, we can model this as a 75⁄25 double-or-nothing bet (same EV as you bet). In that case, we get that a 50⁄50 allocation is optimal.
But note that the Kelly criterion is optimizing for log(wealth)! Log(wealth) approximates utility in individuals, but not in aggregate. Since EA is trying to give all its money away, the marginal returns slope off much more gradually. (See some very rough estimates here.) If you’re just optimizing for wealth, you would be okay with a riskier allocation.
BTW, it’s not just “over-invested in X”, you have to think about the entire portfolio. So given that almost all EA money is either Sam or Dustin, you have to consider the correlation between Crypto and FB stock.
I’ll also add that you have to consider all future EA money in determining what % of the bankroll we’re using.
It doesn’t really matter though, since EA doesn’t “own” or “control” Sam’s wealth in any meaningful way.
There is an actual correct answer, at least the abstract. According to the Kelly criterion, on a 50⁄50 triple-or-nothing bet, you should put down 25% of your bankroll.
Say EA is now at around 50⁄50 Crypto/non-Crypto, what kind of returns would justify that allocation? At 50⁄50 odds, there’s actually no multiple that makes the math work out.
But that’s just for the strict case we’re discussing. See the section on “Investment formula” for what to do about partial losses.
Finally, instead of a 50⁄50 triple-or-nothing bet, we can model this as a 75⁄25 double-or-nothing bet (same EV as you bet). In that case, we get that a 50⁄50 allocation is optimal.
But note that the Kelly criterion is optimizing for log(wealth)! Log(wealth) approximates utility in individuals, but not in aggregate. Since EA is trying to give all its money away, the marginal returns slope off much more gradually. (See some very rough estimates here.) If you’re just optimizing for wealth, you would be okay with a riskier allocation.
BTW, it’s not just “over-invested in X”, you have to think about the entire portfolio. So given that almost all EA money is either Sam or Dustin, you have to consider the correlation between Crypto and FB stock.
I’ll also add that you have to consider all future EA money in determining what % of the bankroll we’re using.
It doesn’t really matter though, since EA doesn’t “own” or “control” Sam’s wealth in any meaningful way.