These are excellent topics for classroom discussion. What I believe should have followed is a stronger justification for using something like the Kelly criterion despite a personal near-linear utility function, on the basis that e.g. not going all the way down to zero asymmetrically preserves access to future investment opportunities, and similar grounds. I think plenty of people intuitively understand this.
But instead, nobody was able to explain to him why he couldn’t throw out the book on risk management, and he acted accordingly.
As another poster mentions, https://news.ycombinator.com/item?id=33550610 , he's aware of the St. Peterburg's paradox. There's no way a rational person can understand the paradox and continue to disregard Kelly's criterion.
1) it's way too conservative for many people
2) it contains strong assumptions about infinitely repeated identical bets that you can't have an adaptive strategy with, none of which describe the real world
3) it's scale-invariant in a way that is inconsistent with its sublinearity
“Rationalisation” is a favourite word of mine, because it is so irrational. I try not to underestimate anyones capacity for self-deception (including my own). Sam surely deeply understood the Kelly Criterion, and risk management, yet he apparently kept doubling down, like https://en.wikipedia.org/wiki/St._Petersburg_paradox
Here, SBF realized, was the rub: When he applied this principle to his own life, he came up short. There was little chance he’d get himself fired from Jane Street. Thus the decision to stick with Jane was a risk-averse preference. It was the logical equivalent of being offered a choice between $50 and 50 percent of $100, and saying, “Give me President Grant.” SBF was risk-neutral on behalf of Jane Street, but not, he realized, for his own life. To be fully rational about maximizing his income on behalf of the poor, he should apply his trading principles across the board. He had to find a risk-neutral career path—which, if we strip away the trader-jargon, actually means he felt he needed to take on a lot more risk in the hopes of becoming part of the global elite. The math couldn’t be clearer. Very high risk multiplied by dynastic wealth trumps low risk multiplied by mere rich-guy wealth. To do the most good for the world, SBF needed to find a path on which he’d be a coin toss away from going totally bust.
Although it is weird the author of the article uses an example of taking both bets, yet Sam throws away one bet (working for Jane Street).
I am criticizing people, possibly including myself, who should have developed more realistic and convincing models clarifying why his behavior was increasingly suboptimal despite his near-linear personal utility function.
His behavior doesn’t really look like self-deception to me. It looks like blindness to poorly articulated limitations of a mathematical model he was taught and understands very well, and I suspect he wouldn’t have been so blind without the “poorly” above.
https://mobile.twitter.com/SBF_FTX/status/133725070407583334...
https://twitter.com/SBF_FTX/status/1299553547596431360
These are excellent topics for classroom discussion. What I believe should have followed is a stronger justification for using something like the Kelly criterion despite a personal near-linear utility function, on the basis that e.g. not going all the way down to zero asymmetrically preserves access to future investment opportunities, and similar grounds. I think plenty of people intuitively understand this.
But instead, nobody was able to explain to him why he couldn’t throw out the book on risk management, and he acted accordingly.