The Benefit Of Betting Culture
Practicing confidence intervals
I piggybacked a thread about betting culture in the trading world. It’s not just degen performance art. It’s how you practice calibration.
Lost lots of money as a junior saying sht that would be met with "put a number on it"
— Kris (@KrisAbdelmessih) July 10, 2022
Are there any other work cultures outside trading that force assertions into prop bets all the time?
Probably the single best practice that can be borrowed from trading culture. https://t.co/VUipmGIaqS
The thread discusses how this looks in a real-world context and how it relates to trade expression. But for those who have a quota on how many clicks they’ll spare on a Substack I’ll reproduce the difference between 2 popular bet types:
First, suppose someone says they can get drive to some destination in 30 minutes. You overhear the convo and are incredulous. You blurt “I’ll buy 30 minutes” meaning you think they are underestimating travel time.
If the person wants to stand on their assertion, you’ll trade. They will be short 30 minutes, you’re long 30 minutes. It’s common to establish the bet style. Futures style or over/under style…
Futures style would be something like $1 per minute. So if the commute takes 27 minutes the original bragger who shorted 30 minutes makes $3.
The second style is over/under (or binary). In this case, it’s assumed the seller is selling 50% probability. Like selling a contract at 50 that can settle to 100 maximum. So the loss is capped. It’s a pure probability bet. You could adjust the odds in a negotiation by saying “hey let’s trade at 40% probability” which means the seller is laying 3-2 (ie 60 to 40).
Because the loss is capped, the difference between these bet styles depends on the distribution of the proposition. In a travel problem, there’s skew to the upside since absent teleportation there’s a lower bound to how long the commute takes.
But the upside is almost unbounded…the person could get in an accident on the way. More realistically there could be a bad accident that causes traffic and turns a 30 min commute into 60 min. So the seller faces more risk selling 30 futures style vs over/under style.
That means they should pad the price they are willing to short at. Say 35 minutes futures style or be willing to trade 30 minutes over/under style.
Over/under bets are focused on the median. Futures-style are more concerned with the mean. The more skew in the bet, the more the prices will diverge.