MICHEL PIREU: Quants’ approach not a panacea for risk or guarantee of reward
Experts warn that more complicated modelling is not necessarily the way forward
A question everyone should be asking is whether they have the know-how to deal properly with risk. When it comes to knowing how much to bet on an outcome, for example, how many people can come up with an answer? To find out, researchers Victor Haghani and Richard Dewey gave young professionals at asset-management firms 30 minutes and $25 to bet on the flip of a computerised coin that came up heads 60% of the time and tails 40% of the time. "Many of the participants had no idea what to do," says Ed Thorp, a pioneer in the mathematical analysis of casino games. "Quite a few of them went broke and a rather large portion of them didn’t make any money at all. Another rather large section made some money but not a lot. The average amount of winnings was about $70 for those not going broke. [But] winnings should be something like $240 if they use the Kelly method … and bet 20% of their bankroll each flip on heads, calculated as 2(.6)-1=20%."What’s the Kelly method? As Investopedia explains...
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