Thursday, April 25, 2002

The IPO Game Debate Rages On!

Mindles Dreck and I have been having on ongoing debate on whether a theoretical IPO game is a good or a bad one for a player to play. To understand the game, read this, and my comments.

Mindles latest reply including the results of a simulation are here. I commented:

I will definitely play around with the spreadsheet.

By the way, I hope you don't take my debate as a sign that I do not enjoy your site. I do very much enjoy it and think very highly of your thoughts.

In the spirit of good fun, I continue to argue that you haven't really addressed my arbitrage argument. I still say I could sell off this exposure for more than $10,000.

To say that some game has a positive expectation, and yet is a foolish game to play due to the skewed distribution of results is to implicitly argue (I think) for a diminishing marginal utility of money/risk averse set of beliefs. But, to be somewhat redundant, people empirically are risk seeking when dealing with small sums of money.

We may both be right in a sense. People may be fools to play this game (perhaps you might even convince me of that), but as you concede it would be less foolish than playing the lottery and therefore it is a possible arbitrage opportunity.

Incidentally, it also seems implicit from your argument that if the house has a limit to how large a loss they can sustain, say $10,000,000, it makes more sense for a person to play. An interesting result...

But taking a closer look at the results, I think I am understating my case! The original Paulos game was for one year. In Mindles' simulation he says: After 50 weeks, 97 players are out, but one of the remaining 3 has a balance of $41 million (gulp). .

Calling 50 weeks a "year" (he didn't give results specifically for week 52), this simulation would have given (at least) a 41 to 1 return for my side!

Ok, no gloating. Mindles does make a valuable point. And if one was not allowed to sell off any of one's exposure, it is less clear to me after seeing the simulation results that it would be a good idea for most investors. Still, I would play.

Update: Tom Maguire says we are all right! (scroll down to read his comment).