Greed is good

Wojtek Sokolowski sokol at jhu.edu
Thu Jun 11 11:25:47 PDT 1998


At 11:00 AM 6/11/98 -0400, John St. Clair wrote:
>Wojtek,
>
>If I walk into a casino with a dollar, place a bet and win $1,000,000
>dollars, does my risk/reward differ from the case in which I parley that
>same $1 bet all evening to $1,000,000? I'm not attempting to apologize for
>the claim that capitalists' risk yada yada yada, but rather, I question the
>assumption voiced on this list that one merely considers initial conditions
>and outcome and assesses risk/returns. Bill Gates et. al. may have a
>personal fortune of $40-50 bil (something like %80 in stock, right?), but
>the risk must capture the fact that he could have sold his shares and walked
>at any point. Getting back to my example, if one were to play poker, say,
>and be up by 100k, isn't one increasing risk by continuing to play?

A few points. First, I do not think that consecutive poker games are independent events, each round carrying the same risk as another. In poker (and in business), risk is the function of two variables, the probability of getting a better hand than your opponents, and the amount of money bet on that hand (i.e. at risk). Since the risk tied to the probability can actualize only if the amount at risk is matched by another player, the actual risk becomes inversely propotional to the amount at risk (for the propbability theory pusrists, think of it as the joint probablity of getting an upper hand and other players not enetering the game).

To illustrate, if you have a deuce you can substantially increase you chances of winning by increasing the amount you bet - so if you bet a million dollars, your win is almost certain since few players will be willing to bet that much. By the same virtue, a player with a full house may loose to one with a deuce, if she is unwilling - or unable - to match the bet.

But that is not the end of the story. As the game progresses you either lose or win, and that has a direct impact on your ability to bet. In short, if you won the first round, you chances of winning the second one increase as compared to the player who lost the first round (assuming all players started with fixed resources). In other words, the probablity of the loosing players not entering the game increases with each round. By the same token, the probablity of wining subsequent games increases for the initial winner.

So from that perspective, the subsequent 'risks' diminish proportionally to the rewards reaped in the previous bets. Even if we assume that business and rewards is nothing but the probability of risk, the game becomes increasingly rigged as it progresses. Think of it as the 'probability theory version' of the monopoly capital theory. Add to it the 'inside knowledge,' gimmicks to prevent some players from betting, and you will find out that the game the captains of industry are playing is rigged beyond imagination.

Another point is that the metaphor of risk becomes very shaky when get into the rewards for economic activities. It goes directrly agianst the grain of human capital theory, the standard mythology of the capitalist markets, that links contributions to rewards. But even more importantly, you can think of game winning as a reward for your 'risk' only if you risk your own resources rathr than those of other people. The only person moving other people's money who is allowed to the game is the croupier - who gets none of the money the house wins under his attendance. So why the CEOs, who are hardly anything more than croupiers, claim a lion share of the corporate spoils?

Regards,

Wojtek



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