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#1
March 14th, 2011, 11:52 AM
 rrwoods Senior Member Join Date: May 2009 Posts: 329
certainty equivalent

One of the statistics CVData shows is the CE (certainty equivalent). I've done a lot of reading on the topic, and I understand what the CE is supposed to represent from a generic investing perspective. I have started using it when I analyze games and spreads. BJ21 has a very detailed article on what it is, but I feel dumb trying to read the formulas :-(

What is the formula CVData uses to compute the certainty equivalent?
#2
March 14th, 2011, 01:58 PM
 Southpaw Senior Member Join Date: Nov 2010 Location: United States Posts: 490

Quote:
 Originally Posted by rrwoods One of the statistics CVData shows is the CE (certainty equivalent). I've done a lot of reading on the topic, and I understand what the CE is supposed to represent from a generic investing perspective. I have started using it when I analyze games and spreads. BJ21 has a very detailed article on what it is, but I feel dumb trying to read the formulas :-( What is the formula CVData uses to compute the certainty equivalent?
Eugh, the Certainty Equivalent makes my head hurt. As soon as I looked at the article I think you are referencing, I quickly appreciated Don Schlesinger's general description of it.

Hopefully someone comes in here to give a good answer.

Spaw
#3
March 14th, 2011, 02:02 PM
 rrwoods Senior Member Join Date: May 2009 Posts: 329

Quote:
 Originally Posted by Southpaw Eugh, the Certainty Equivalent makes my head hurt.
From one mathie to another: Me too. I understand a lot of gambling math (and a lot of non-gambling math, up to and including the basics of differential equations). The only thing I get about CE is that it's the amount of money I'd take not to play... but I don't know why or how that number is derived :-/
#4
March 14th, 2011, 02:32 PM
 FLASH1296 Executive Member Join Date: Oct 2007 Location: East Coast, U S A Posts: 3,749

Hmmm. Where is Assume_R when we need him ?

Last edited by FLASH1296; March 14th, 2011 at 05:19 PM.
#5
March 14th, 2011, 03:06 PM
 Southpaw Senior Member Join Date: Nov 2010 Location: United States Posts: 490

Quote:
 Originally Posted by rrwoods From one mathie to another: Me too. I understand a lot of gambling math (and a lot of non-gambling math, up to and including the basics of differential equations). The only thing I get about CE is that it's the amount of money I'd take not to play... but I don't know why or how that number is derived :-/
If you get a moment, could you send me the link to the page we were discussing. I can't seem to find it and haven't looked at it in a few months.

Thanks,

Spaw
#6
March 14th, 2011, 03:08 PM
 rrwoods Senior Member Join Date: May 2009 Posts: 329

This is the one I know of, though it isn't by Don S.
http://www.bj21.com/bj_reference/pag...analysis.shtml

I'll have to flip through BJAIII when I get home and see if there's anything in that about it.
#7
March 14th, 2011, 03:13 PM
 Southpaw Senior Member Join Date: Nov 2010 Location: United States Posts: 490

Quote:
 Originally Posted by rrwoods This is the one I know of, though it isn't by Don S. http://www.bj21.com/bj_reference/pag...analysis.shtml I'll have to flip through BJAIII when I get home and see if there's anything in that about it.
Yes, this is it. Don Schlesinger doesn't have anything other than generalities to describe CE.

Spaw
#8
March 14th, 2011, 05:55 PM
 sagefr0g Executive Member Join Date: Apr 2006 Posts: 5,141

the kelly faq has some stuff on CE :
http://www.bjmath.com/bjmath/kelly/kellyfaq.htm
Q2 thru Q5 ......
#9
March 14th, 2011, 06:27 PM
 zengrifter Executive Member Join Date: Nov 2005 Location: SoCal Posts: 10,532

Quote:
 Originally Posted by rrwoods One of the statistics CVData shows is the CE (certainty equivalent). I've done a lot of reading on the topic, and I understand what the CE is supposed to represent from a generic investing perspective.
I think that CE is some negligible BS that MIT team came up with before they lost a million\$s of OPM, yes? zg
#10
March 14th, 2011, 06:28 PM
 assume_R Executive Member Join Date: Dec 2009 Posts: 856
My understanding

So I'll try to explain as best as I understand it.

Firstly, the equation we use is WinRate - Std^2/(2*KellyFraction*Bankroll)

So your "Kelly Fraction" is essentially how we are going to define how "risky" you are as a person. The whole concept is, according to wikipedia, " the guaranteed amount of money that an individual would view as equally desirable as a risky asset."

So what it means, is based on your individual kelly fraction (which quantifies your risk, based on how much of a RoR you'd accept), this will tell you if it's in your better interest to take a risky bet (i.e. a gamble), or a risk free bet (i.e. variance = 0).

Put it simply, for a given win rate, etc. of a game, and a given kelly fraction you play at, it would be better to take a job (we are defining a job as risk free) in which you are paid higher than your CE for the game you play.

So let's say you have a win rate of \$50, and the CE is \$30 (given your bankroll, kelly fraction, etc.) If somebody offered you a full time job for \$25/hour, don't take it, because it's better to spend your time with a semi-risky \$50/hour. But if they offered you a full time job for \$35/hour, take it.

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