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Utility on Investment

The thing about investing money is that it's pretty hard for an individual to do much better than 5-15% per year consistently, depending on your risk tolerance and connections (my best investments have been putting money to work with friends' businesses). Five to fifteen percent is pretty good, but it's inside-the-box thinking to stop there. What else can we do with our money?

As a disclaimer, I have a good portion of my money in investments that make a return like that. It's good to grow your cash and I'm not saying you shouldn't. But what if you diversify your portfolio beyond earning a financial return?

After all, the point of money is utility, so why aren't we thinking one step further and thinking about how we can earn the most utility on money?

I love to find situations where my capital is preserved, grows a little, or is consumed very slowly, but which yields me a lot of utility as a result. For example, I bought my RV for $18k, plus probably $15k over its life in repairs, and maybe another $6k in improvements. I sold it last week for $30k, so I lost $9k over the eight years I owned it.

Incentives, variance and an un-steady income

On Sharplayer

The nature of a lot of professional gambling is it's short-term uncertainty. As I already covered here, long term returns must be positive, otherwise we're on a road to poverty not riches. However in the short-term our return is highly volatile. This volatility is a result of the variance and standard deviation of events occurring from their probable occurrence. I'm going to be writing a lot about variance, as it's an important aspect psychologically, and mathematically as a professional gambler. Today I'd like to look at it's impact on working hours and incentives.

Due to the volatile short term nature of a lot of advantage gambling, on some days I may make large 4 figure sums, and on other days 4 figure losses. Yesterday was a great example of this. Before the day had really got started, I was already a comfortable £5k in profit. The expected value of my actions that morning however, had been nothing more than a few hundred pounds. Variance was in my favour, and I'd already surpassed my daily target.This contrasts with the beginning of the month, where a week into April and my balance sheet showed a fairly deep £5,000 loss.

The impact of these swings on my work-load is noticeable. Naturally, when I'm down I will work harder, longer hours chasing increasingly diminishing value, just to try to swing it back the other way. This is not dis-similar to a gambler going on a 'tilt', and chasing their losses. Only when I tilt, I chase my losses with a positive expected return: Eventually I'm 99.9% guaranteed to end up on top again. In terms of working hours, efficiency and 'value-per-hour', I'm more profitable when I'm making losses. It forces me to work harder.

As my risk tolerance adjusts, and I become less affected by the variance, I expect to see my work attitude change. I should be working to an expected value target, rather than net-profit. This would see my daily earnings become more volatile, whilst my work load become roughly constant. It's something I'm working on, and for the mean-time I find the incentive of loosing periods beneficial to finding new avenues, value and a 'fixer' mentality.There's nothing better than digging yourself out of a hole, and it's when I have my back to the wall that I innovate and push myself harder.

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