Comments on: Risk vs. Reward: Expectation Value of Utility http://www.embracingchaos.com/2007/10/risk-vs-reward.html Analysis of Trends in Technology, Business, Society Wed, 25 Jan 2012 18:52:12 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: leodirac http://www.embracingchaos.com/2007/10/risk-vs-reward.html/comment-page-1#comment-301 leodirac Mon, 01 Oct 2007 12:36:45 +0000 http://wp.embracingchaos.com/2007/10/risk-vs-reward.html#comment-301 <p>Josh -- If I were doing this for real, I would draw out a probability distribution for several possible payouts from the startup. Maybe there'd be a 1% chance of $10m and a 3% change of $3m and a 6% chance at $1m. But that would just clutter what I'm trying to express in this example.</p> <p>Geoff -- To clarify, I didn't say this was my own personal utility curve. It's just hypothetical. After all, I'm a full-time grad-student and not looking for a job right now.<br /> </p> Josh — If I were doing this for real, I would draw out a probability distribution for several possible payouts from the startup. Maybe there'd be a 1% chance of $10m and a 3% change of $3m and a 6% chance at $1m. But that would just clutter what I'm trying to express in this example.

Geoff — To clarify, I didn't say this was my own personal utility curve. It's just hypothetical. After all, I'm a full-time grad-student and not looking for a job right now.

]]> By: Josh http://www.embracingchaos.com/2007/10/risk-vs-reward.html/comment-page-1#comment-300 Josh Mon, 01 Oct 2007 11:16:53 +0000 http://wp.embracingchaos.com/2007/10/risk-vs-reward.html#comment-300 <p>Interesting post. How did you come up with 10% success rate at a startup? This seems to be the variable with the largest weight. 10% seems either too optimistic or too over confident depending on your point of view. I've seen enough startups go under to think that the true success rate is closer to 1%...</p> <p>That said, I'm confident that my chance of success is higher than the average... just like everyone else. :)</p> Interesting post. How did you come up with 10% success rate at a startup? This seems to be the variable with the largest weight. 10% seems either too optimistic or too over confident depending on your point of view. I've seen enough startups go under to think that the true success rate is closer to 1%…

That said, I'm confident that my chance of success is higher than the average… just like everyone else. :)

]]> By: Geoff http://www.embracingchaos.com/2007/10/risk-vs-reward.html/comment-page-1#comment-299 Geoff Mon, 01 Oct 2007 10:11:30 +0000 http://wp.embracingchaos.com/2007/10/risk-vs-reward.html#comment-299 <p>Interesting!</p> <p>This does help explain that gambling sense people have to at least *try* to get that big payout, even if the odds are set up such that the expected value (without converting to Jollies) seems significantly lower than the cost of paying to play -- like the lottery. </p> <p>Like you say, your personal curve of Jollies/$ sure makes a big difference! </p> <p>But, I suspect your curve flattens off a bit too early for most people.</p> <p>My personal curve would accelerate (more and more Jollies/$) and then wouldn't flatten off until I reach a $ value for which everything I can reasonably dream of buying is satisfied and I can live on the interest from the remaining money forever. After that value the curve levels off quickly. So, maybe a peak at about $2 million for me.</p> <p>With the peak of Jollies/$ moved out to about the $2 million point, the decision in the big company vs. startup question with your pay numbers isn't nearly so close.</p> <p>-- Geoff</p> Interesting!

This does help explain that gambling sense people have to at least *try* to get that big payout, even if the odds are set up such that the expected value (without converting to Jollies) seems significantly lower than the cost of paying to play — like the lottery.

Like you say, your personal curve of Jollies/$ sure makes a big difference!

But, I suspect your curve flattens off a bit too early for most people.

My personal curve would accelerate (more and more Jollies/$) and then wouldn't flatten off until I reach a $ value for which everything I can reasonably dream of buying is satisfied and I can live on the interest from the remaining money forever. After that value the curve levels off quickly. So, maybe a peak at about $2 million for me.

With the peak of Jollies/$ moved out to about the $2 million point, the decision in the big company vs. startup question with your pay numbers isn't nearly so close.

– Geoff

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