The Game Was Rigged in Their Favor. 28% Went Bust Anyway | Kris Abdelmessih on How to Size Bets

Matt Zeigler (0:02)

You're watching Excess Returns, I'm Matt Zeigler. Join today, we're reviving this. This isn't quite Teach Me Like I'm Five, but this is definitely Teach Me Something, because there was an amazing essay. We ran it on Panoptica, if you haven't seen it yet. After this, you'll size bets in your head. That's a promise I can get behind. Moontower's on, Kris Abdelmessih, welcome back to Excess Returns.

Kris Abdelmessih (0:24)

Thanks, Matt, it's good to be here.

Matt Zeigler (0:26)

I'm super excited about this. Number one, because I love the idea of the Kelly bet. I've built spreadsheets, I've had some fun with this. But then you wove it in and you lay it over all these areas. I thought this was just supposed to be what I'm, what?

Playing blackjack in 1955 at a casino with a bunch of mob bosses. And here you are telling me I can put it against my marketing budget and things. So this is super neat. What are you gonna teach me today?

Kris Abdelmessih (0:51)

Yeah, so I'm gonna teach about, we're gonna talk about the Kelly criterion, which prescribes an amount to bet. And we're gonna talk about, well, what is the idea behind it? And where can we use it in life?

And then also what intuitions fall out of it? Because what's very interesting is a very simple formula. But it just has a lot of application. Not necessarily the formula itself, the intuition behind the formula is widely useful for kind of dealing with uncertainty in life in general. So that's what I hope to get across. I mean, I think that people will be able to walk away from this with the formula in their head and actually being able to use it when it matters. But I think the really interesting part about it is recognizing problems in real life and saying, Oh, what are the variables that are in that problem? And how do they map back to the formula? And creating a better intuition about ultimately decision making.

Matt Zeigler (2:06)

Well, I'm all here for this. I think in my brain, the philosophical connection has always been or has long been, how do I just survive playing this game? How does an unfortunate outcome not knock me out of the game?

But I have a weird mental sense of that, and I think you're about to explain to me on a much deeper level. So let's dive in.

Kris Abdelmessih (2:28)

Yeah, sure. So we're going to what we're going to do is we're going to start with, there was a study published this almost 10 years ago today, like it was October of 2020, 2016 This is published, but Richard Dewey and Victor Heghani published a study called The Observed Betting Patterns on a Bias Coin. And what they did is they invited 61 people.

These were mostly finance people. Out of the 61 people, about a quarter of them were working professionally in finance either as analysts, there was like two large asset management firms that were represented amongst that group of people. But they bring in 61 people and they give them each $25 and 30 minutes. And they put them in front of a computer simulation that allowed them to flip a coin. And the coin was biased in their favor.

So whatever amount you bet, you could bet anything that you want it between, you know, up to your bankroll. And if you won, you got your, you know, if you bet $2 and you won, you would get $2 back. And if you lost, you lost your $2. And you had a 60% chance of winning. So the game was rigged in your favor. You should make money from playing this game.

Matt Zeigler (3:54)

Did they know this? Like you sit down at the computer terminal and they tell you that this is a rigged, a slightly rigged game?

Kris Abdelmessih (4:00)

They did.

So they knew they were playing an advantage game. Yeah, absolutely.

Matt Zeigler (4:05)

And this is why them being smart, it's not like we approached, I don't know, pick your dumb family member of choice and think about them not understanding this. They're theoretically smart people.

Kris Abdelmessih (4:16)

Yeah, these are people that are educated and this is an important point because what we're going to learn today is what's, I like things like this because they're very, very important and at the same time, they're really not that hard to learn. So things that are like that are just kind of amazing. So that's why I like doing this.

Matt Zeigler (4:41)

So let's take me in what happens to these guys, what happens to these people in this experiment?