Lack of risk aversion in SBF led to FTXDM implosion

Victor Haghani, one of the founding partners of LTCM, applied economic theory choice under uncertainty To try and explain how FTXDM fell on the ground.

In layman’s terms, “choice under uncertaintyMeans you have to make a decision, but you are not sure what will happen as a result of your choice. The theory holds that, in that instance, you would Choose the option that maximizes expected utility rather than expected wealth.

going against the sane

Here is a good example of choice under uncertainty:

Let’s say you find an investment with a 98% chance of going zero and a 2% chance of 10,000x ROI. Most wealthy people would prefer to invest between 0.1% – 1% of their wealth in this investment as it is a reasonable thing to do. Not SBF though.

“Yeah. I guess the way I looked at it was like, let’s maximize EV: whatever has the highest net expected value is what we should do. As opposed to some super sublinear utility function, which That’s it, make sure you stick to a moderately good path over all, and then anything beyond that is gravy.

Victor Haghani, LTCM Founder.

Haghani relates this principle to the risk appetite of SBFs. He says that Bankman-Fried made its investment decisions “as if they had no risk.” In the example above, SBF would prefer to invest 100% of its assets in that investment as it maximizes expected wealth.

Your money is safe with us!

Bahamas Securities Commission Has been confirmed Financial information about the fallen FTX exchange can now be legally shared with debtors in the US. The commission also revealed that it has $3.5 billion in frozen FTX Ventures assets.

As digital assets held by the commission were transferred to ‘safekeeping’ on November 12, 2022, investors don’t know how to feel about this new information.

According to the press statement provided by the commission, FTX Digital Markets (FTXDM) was under a string of cyber-attacks that knocked employees out of the FTXDM Amazon web server.

At the risk of losing all remaining digital assets, the Commission obtained a court order to secure the remaining digital assets by transferring them to crypto wallets controlled by the Commission.

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