What does it mean to be a "dispossessed" hedge fund?

What does it mean to be a "dispossessed" hedge fund?

This article is from Snowball.

I started to think about what is the secondary thing to give up, to give it up so that I can focus on the most important thing. And in the end, there is only one thing that is most important to me: to be with you.

• Choosing the red button has a 100% chance of winning 1 million, choosing the green button has a 50% chance of winning 100 million.

  I'm trying to answer this question, which is more interesting than I thought.

  • 1. According to the theory of expected value, the green button is worth 50 million.
  • 2. A lot of people are still willing to pick the million confirmed because they can't stand anything with a 50% chance.
  • 3. In other words, if a person can't stand to eat anything, then the choice on the right is the same as saying you have a 50% chance of getting a hundred million and a 50% chance of dying.
  • 4. Think openly, if you have this option, you can sell the option on the right worth $50 million to someone who can afford it, say $20 million (or even more);
  • 5. To further optimize the last one, considering the increased probability of you finding people willing to buy your option, you can sell the option for only 1 million (low down payment), but ask the buyer to share a million times with you.
  • 6. Going one step further, you can make this option a lottery public offering, cutting the option into retail, two coins one, printing 200 million.
  • 7. With 6's successful business model, they started raising the next $100 million as the top prize, making it a business.
  • 8. It raised $2 billion, went public, and had a market capitalization of $10 billion, based on P/E.

• From 1 million to 10 billion, let's look at the mathematics behind it.

  In economics, there are three well-known risk-decision theories: the expectation-value theory, the expectation-benefit theory, and the prospect theory.

  In the 1970s, Kahneman and Tversky systematically studied prospect theory. For a long time, mainstream economics assumed that everyone was rational when making decisions, but this was not the case; and prospect theory, which added asymmetrical psychological effects of conditions such as income depletion, high and low chance of occurrence, successfully explained many seemingly irrational phenomena.

  Based on the above theoretical foundations, I want to explore some interesting topics:

1. The anti-human mentality of making decisions at every step according to the best overall odds is the first secret of success in the traditional sense.

2. The poor sell their marginal rights cheaply to the rich, the marginal rights are more hidden, the surplus value is exploited more (not that I agree with the concept of surplus value);

3. The most popular AI today is the one that relies on autonomous, cold-blooded computing at every step to beat humans.

4. However, irrationality, impulse, has the potential to be the last bastion of humanity.

• We'll go over the basic concepts first.

  Expected Value Theory (the basic decision-making tool of the wise)

  According to the expectation value theory, a 100 percent chance of getting 50 million and a 50 percent chance of getting 100 million is a one-time thing.

  Bayes' theorem, one of the simplest formulas used most frequently by intelligent decision-makers.

  Explanation: Use the odds of losing times the amount of potential loss, then use the odds of winning times the amount of potential profit, and finally use the latter minus the former. This is how we've been trying to do it. This algorithm isn't perfect, but it's as simple as that.

  • Example A: (from former Goldman Sachs CEO Rubin)

    After the merger was announced, Univis shares were trading at $30.5 (up from $24.5 before the merger was announced).

    This means that if the merger is negotiated, the share price from the leveraged transaction could rise by $3 as Univision shares would be worth $33.5 per share (0.6075 × price of a share of Beady).

    If the merger is not successful, the shares of Univis could fall back to around $24.5 per share.

    We set the probability of a merger to be about 85% and the probability of a failure to be about 15%; based on the expected value, the probability of the stock price rising is $3 times 85% and the risk of falling is $6 times 15%.

    So 3 dollars times 85% is 2.55 dollars.

    -6$ times 15% is equal to (probable decline) 0.9$.

    So the expected value is $1.65.

    That $1.65 is what we expect to get by putting $30.50 of our company's capital on hold for three months. That's after taking into account a possible return of 5.5%, or 22% on an annual basis. Anything less than that is our bottom line. We don't think it's worth paying our company's capital for an annual return of less than 20%.

    Rubin specifically explains that this is what he does every day, it looks like gambling, and he does lose often; but he wants to make sure he makes money most of the time.

  • Example B: (from the Black Swan author)

    Taleb said at an investment conference: "Well, I believe there is a good chance that the market will rise slightly next week, about 70%". "But he is selling a lot of S&P 500 index futures, and he is betting that the market will fall".

    The analysis is as follows: if the market is up 70% next week, the market is down 30%; but if the market is up only 1%, the market may be down 10%. The future outcome is: 70% × 1% + 30% × (-10%) = -2.3%, so the chance of a profit from short selling stocks should be higher.

    As Charlie Munger put it, Buffett does this simple math problem every day. Rather than a math skill, it's a mindset.

    The odds are sometimes counterintuitive.

  • Example C:

    A taxi crashed on a rainy night, and a witness at the scene said he saw the car was blue. It is known: (1) The eyewitness's accuracy of identifying the blue and green taxi was 80%; (2) The taxi in the area was 85% green and 15% blue. Q: What is the probability that the accident taxi was blue?

    A: The car is a green car but the probability of it being seen as a blue car is (0.15×0.8), the car is a blue car and the probability of it being seen as a blue car is (0.15×0.8), so the car is really a blue car with a probability of (0.15×0.8) / (0.85×0.2) + (0.15×0.8) =41.38%); that is, the car is more likely to be green.

    Our brains are amazing at what they do, but in some respects they are very naive in terms of mathematical intuition.

    However, the expectation theory cannot answer why the red button is worth as low as a million and there are still so many choices.

• Expected utility theory (ambition or fear)

  Daniel Bernoulli's 1738 paper on the concept of utility challenged the decision-making criterion of expected value in terms of quantity, which consisted mainly of two principles:

  • a, the principle of diminishing marginal utility: how much of a person's ownership of wealth is beneficial, i.e. the first derivative of the utility function is greater than zero; as wealth increases, the rate of increase in satisfaction decreases, and the second derivative of the utility function is less than zero.

  • b, Principle of Maximum Utility: Under conditions of risk and uncertainty, the criteria for individual decision-making behaviour are to obtain the maximum expected utility value, not the maximum expected monetary value.

Returning to the case at the beginning of the text, the red button is chosen to immediately transform into a million, giving up the option of 50 million, on the one hand because the company is satisfied with the one million, in terms of its wealth, one million has already brought a quantitative change, and one more quantitative change is unimaginable; on the other hand, the green button wants to avoid the 50% risk of zeroing out. The fear of zeroing out is much greater than the expectation of 49 million.

To be precise, selecting the red button intertwines the synergy between the expected utility theory and the prospective theory of potassium.

• Prospect theory

  In the words of Kahneman, who won the Nobel Prize for his theory of prospects:

  • A. People are risk averse when they get it.

  • b, when losing, the rational person is risk averse, and the normal fool is risk-averse.

  • c, rational decision-makers' judgments of losses are not influenced by reference points, whereas normal fools' judgments of losses are often based on reference points (e.g. rational decision-makers do not have to wait for a return to throw a stock that should be thrown away)

  • D, normal fools usually avoid losses.

    As behavioral economics studies, social, cognitive, and emotional factors can lead to less rational choices.

    For example, the baseline of wealth, as a reference point, largely determines whether people go by red or green.

    There are exceptions.

    Mark Zuckerberg is from a middle-class family; he was able to turn down a $1 billion acquisition of Yahoo after two years of hardship, much like Snapchat turned down a $3 billion acquisition of Zuckerberg years later. This is one of the Silicon Valley spirits.

    I once spoke to an older brother who said, "What we really lack is a father telling himself you are a bad boy". Why does the Shu Shaan Mendi or wealthy family have a bunch of talented people, besides genes and resources, there may be other reasons:

    • 1. A sufficiently high benchmark, not swayed by small gains, is more willing to take risks (which are actually low chances) and thus capture high returns.
    • 2. The impact of a group of people around you.
    • 3. I'm so excited to be a part of this.

    They are less likely to buy cheaply and sell their rights of opportunity than ordinary people.

• Abandoned right of opportunity

  • 1. At the key decision-making point of the wealth gap, the very poor are giving up their right to opportunity.
  • 2. The secret to winning is to stick to the odds and not change the rules of the game even if you get a setback.
  • 3. Buying a lottery ticket is the most expensive self-denial about the option of chance, so it is called collecting an IQ tax.

    If you have a lot of money, invest in value, if you have little money, bet on it. This is probably the most widely practiced stupidity in the investment world.

    Things of little chance are difficult to achieve and seem easy; things of great chance seem far away and are much more likely to reach their destination.

    Giving up one's right to chance and choosing a comfortable little chance is actually using one's own meager resources to subsidize the success of one's success.

• Why can't smart people win the lottery?

  If life is a game of chance, if a series of choices we make determine the final outcome, then it would seem that the smart ones should have the upper hand; but they don't.

  Chance comes from gambling. Pasquale and Fermat's interest in the peculiar outcomes of gambling led them to propose some principles of chance theory, which led to the creation of chance theory.

  The secret to making money, given the 21 points of the highest odds of a casino player winning and not losing, is:

  • 1. Choose a casino that is friendly (as opposed to an industry);
  • 2. I'm not sure if I'll be able to play the game.
  • 3. In addition, the number of cards in the game, such as those in the 21st minute of the Cannes Film Festival Final, has increased.
  • 4. In the event of a tie, increase the stakes.
  • 5. I'm not going to go into detail about what happened, but I'm not going to go into detail about what happened.

    A smart person can do a good 1 and a bad 4. But a 5 is a weakness for many smart people.

    Google's technical team and professional chess players worked together to study AlphaGo's game against Li Shih-Shing to see how the AI actually thinks while playing the most difficult of all human intellectual games.

    AlphaGo calculates its own chances of winning at almost every hand of chess. That is, for it, each decision point is independent, and AlphaGo calmly searches for the maximum chance of winning at the time of the hand.

    Like Rubin, Taleb, and Buffett mentioned earlier in this article, they are almost human-like Alpha Goes who insist on acting on chance, often seemingly counterintuitive, anti-human, anti-comfortable.

    Most intelligent people do not have this wisdom and great way of doing things.

• How to sell options cheaply?

  Many people have a choice of abcd, but there may be a couple of other options.

  In order to deal with the German code machine, Turing decides to use the machine gun to attack the Germans, but leads a disapproved budget and drinks to make him obey orders from his superiors. Turing asks Turing who is his superior.

  I can press red or green, which means I have a choice.

  The third path, selling options, selling them to VCs and PEs, is to leverage the risk preference and affordability of capital, sharing a value zone between $1 million and $50 million.

  Interestingly, the world of wealth leaves an open door for a poor, ambivalent young person; they don't want to lose 50 million because they want one; they just need a broader vision.

  This is one of the core drivers of the creation and distribution of wealth in today's society. It is also the wonder of capital. It is the thought and action patterns that determine the ultimate food chain of wealth.

• Life is limited

  There are many choices in life that cannot always be driven by the best of luck or the best of luck. Just as in a fierce sea quarrel, Captain Jack temporarily abandons the pursuit of enemy ships and chooses to dock on a small island to fulfill the dream of a naval surgeon on a Darwinian scientific expedition.

  Thinking of a friend, a couple decided to put off starting their own business and real estate to spend time with their growing children. Many good things and good times are due to some poorly calculated choices.

  Of course, it's better to have enough cash on hand, won by AlphaGo's odds calculator, to spend on ourselves, or to help people who don't have the right to gamble in their lives - like the Bill Gates charity.

  Perhaps the choice itself is more important than the wealth. What if time is the most precious asset, the choice of a limited life?

  I remember going to Guangzhou alone after graduating in 1995, and meeting a master, who saw that I had some spirituality without a master, and didn't shy away from praising it in front of others. This is a talented young man. (time is always old and young, so far no one has called me a middle-aged genius).

  The company became the first company I joined, and its name has a broad metaphor for my life: Choose Your Own Company Limited.

Source: Snowball shrimp Translated from the Sharing Knowledge Base