certainty equivalent

[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?

[Southpaw]

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

[rrwoods]

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 :-/

[FLASH1296]

Hmmm. Where is Assume_R when we need him ?

[Southpaw]

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

[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.

[Southpaw]

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

[sagefr0g]

the kelly faq has some stuff on CE :
http://www.bjmath.com/bjmath/kelly/kellyfaq.htm
Q2 thru Q5 ......

[zengrifter]

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

[assume_R]

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.