Ecoinometrics - A framework for asymmetric bets

How a framework for thinking about your investments as bets can help you make better decisions.

In this newsletter we often talk about asymmetric bets. They are the kind of investments that provide outsized potential returns compared to the downside risk. Today let’s dig a bit further on this definition and see if we can build some framework to think about investing around that idea.

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A framework for asymmetric bets

There are tremendous advantages in thinking about investments as bets. In fact I’m pretty sure all professional investors think about it this way. 

First the label of bet makes it explicit that you are dealing with probabilities. That alone is an important mindset shift that’s likely to temper the human natural tendency for overconfidence.

Second when you think of investing in terms of bets it forces you to make your assumptions explicit:

• What are the possible outcomes of the bets?

• How likely is each outcome?

• How much am I ready to wager on that?