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Lessons from Betting on a Biased Coin: Cool heads and cautionary tales Elm Wealth

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You’re invited to a talk by a former hedge fund manager who was a partner at a fund that famously flopped about twenty years ago. You turn up, hoping to hear some valuable insights (or at least some entertaining tales) but instead you are offered a stake of $25 to take out your laptop to bet on the flip of a coin for thirty minutes. You’re told the coin is biased to come up heads with a 60% probability, and you can bet as much as you like on heads or tails on each flip. You will be given a check for however much is in your account at the end of the half hour.2 That’s it. Would you feel it was worth your time to play, or would you walk out? How would you play the game? What heuristic or mental tool-kit would you employ? These questions led us to conducting the exact experiment described above. By having participants engage in an activity as simple as flipping a coin, the betting strategy and its evolution are easily isolated for observation. This simple game also turns out to have prope

October 26, 2016 Investing 101 Lessons from Betting on a Biased Coin: Cool heads and cautionary tales By Victor Haghani and Richard Dewey Introduction You’re invited to a talk by a former hedge fund manager who was a partner at a fund that famously flopped about twenty years ago. You turn up, hoping to hear some valuable insights (or at least some entertaining tales) but instead you are offered a stake of $25 to take out your laptop to bet on the flip of a coin for thirty minutes. You’re told the coin is biased to come up heads with a 60% probability, and you can bet as much as you

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