22 December 2011

Life lessons from playing poker

Duncan Green is offering a small bet that the charter city in Honduras won't work. Here's the thing, sometimes its worth making the bet even if the odds are stacked against you, because you also have to take into account the payoff to success. An economist would call this expected value. Even if there is only one card in the deck that can complete my hand, and I am very likely to lose the round, I should still call a £5 raise if there is £500 in the pot that I could win.

Even if the odds of a Charter City taking off in Honduras are 1 in a thousand, its still worth a punt if the payoff could run into the billions.

So what odds do you say Duncan? I'll give you £10 if it fails and you give me a £1000 if it works?

Edit: Andrew reminds me about opportunity costs. If I only have £6 left then it would be silly to call a £5 raise on such long odds. The opportunity cost is playing the next round, where I might have better odds of winning a smaller amount. But if I have £500, then I can afford to take a smart £5 gamble with low odds of winning. So its a question of the overall budget constraints too. I'm not convinced that there are huge opportunity costs associated with the needed investment in a Honduran Charter City, relative to overall government expenditure (the idea is to encourage private investment for most of the construction). 

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