"The race is not always to the swift, nor the battle to the strong, but that is the way to bet" —Hugh Keough
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I think that misses the point of this article. More appropriate might be:
"The race is often to the swift, and the battle to the strong, but the way to bet is on those with miscalibrated odds."
If the odds are well calibrated, the expected return is zero; we might as well not bet. The same goes for speculating on well-priced assets.
If we have reason to believe that the odds/prices are miscalibrated, we can expect a positive return by going long/short (depending on which direction they're off).
Well, the original quote is more about making plans. Georgia is at war with Russia: who will win? You can -- and people very much do -- try to set up a situation with a massive payoff for you in the unlikely event that Georgia wins. But the maxim is there to remind you that Georgia isn't going to win.
Interacting with a bookie is a whole different context than interacting with reality.
> Interacting with a bookie is a whole different context than interacting with reality.
I think the point of the article was that interacting with the stock market (and potentially other areas of many businesses) is more like interacting with a bookie than interacting with reality.
Yes; I'm just saying I don't think the article's point detracts from the maxim.
I'd still say it's not the likelihood or the payoff which matters, it's the expected return. If the payoff is massive enough to overpower how unlikely it is for Georgia to win, then it's worth setting up. It's also worth setting up situations which pay off if Russia wins, and the higher likelihood of that outcome should make us accept situations with lower payoffs in that case.
I can think of a few reasons not to follow this strategy:
- If our uncertainty is too high, we might want to avoid the risk; e.g. even if Georgia wins, we might not get anything out of it.
- If the commitment is too high, e.g. a Martingale.
- If setting up one outcome puts another at risk; e.g. if we fund Georgia's war effort, such that Russia would retaliate if they win; or the other way around; or both!
That's a nice riff on the original:
"Again I saw that under the sun the race is not to the swift, nor the battle to the strong, nor bread to the wise, nor riches to the intelligent, nor favor to those with knowledge, but time and chance happen to them all." —Ecclesiastes 9:11
To understand where Ecclesiastes is coming from:
In the wisdom literature, books like Proverbs will typically state the common case and it's Ecclesiastes that will state the exception. This keeps the wisdom literature balanced as a set of principles, not rules.
The Hugh Keough quote is a great summary then of the main point, which I won't restate.
Different context. If you're being offered the same odds on every bet, bet on the likely winner.
But it's not. From the article:
> you want to bet on the mispriced horse, not the horse most likely to win
If one horse is given 1:50 odds but should have been given 1:100, how many races would you have to bet on to make money on those odds?
Let's assume the odds are fair such that the odds of all horses sum up to 1. Betting on all other horses would give you 1:1.02 odds whereas they should have been 1:1.01. While there is no way to answer for sure how many races you would have to bet on to make money, we can look at the probabilities. There's a 95% likelihood that the horse will lose 5 races in a row. If you start with $100 and reinvest your winnings every time you'd earn a profit of $10 with 95% likelihood, meaning there's a positive expectation value. On the other hand, if the 1:50 odds were right, the probability of it losing 5 times in a row would be around 90%, leading to a neutral expectation value.
Except investing isn't like a horse race. Each horse has a different finish line, and those finish lines are in flux during the race. Crucially, you can change your bet in the middle of the race.