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.
#Lack #risk #aversion #SBF #led #FTXDM #implosion