People prefer situations where they know the risk. In experiments ran by Daniel Ellsberg, participants were asked to bet on a known 10% chance to win and an unknown chance to win (which was actually 90%). People tend to choose to bet on the 10% option.
This is not considered risk aversion, but ambiguity aversion. People did not bet on the unknown option because it could be less than 10%.
See also:
- Bayes' Theorem might have helped people reason about the likelihood of the unknown odds
- Game theory
Links to this note
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In Venture, You Can Only Lose 1x Your Money
Venture capitalist Bill Gurley, when talking about losses reminds people that a fund can lose it’s money 1x on a failed investment in a business that goes under but can miss out 10,000x if they fail to invest in a big winner.
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A formula for figuring out how much you should bet to maximize the outcome.