Every few months a group of the best risk managers in Russia play the lottery. Not for the thrills you might expect, but for the calculated and low-risk profits. I have written a series of articles about this, showing some of the logic, the math and the returns we got.
Well, yet another big game was yesterday. Two in a row, very rare and was promising to be generate good profits. We did the usual math and the initial calculations were positive: low probability of losing and moderate-high profit in most simulations.
But there was one thing that was troubling us. One assumption which had to hold true for the game to be worthwhile. It was the number of other players. As usual, we analysed the statistics from previous games and run few simulations:
- if there would be 250K players we would make between 6% and 28% after tax profit (50%CI), moderate but why not, we were prepared to play
- if there would be 300K players however we would loss between 9% and make 11% after tax profit (50%CI)
- if more players, everyone would lose money on average.
Based on historical numbers and the player behaviour on similar other games we expected between 200 and 350K players. We also tested few strategies, the expected returns were similar, so the strategy was less important.
Now we just had to wait and see what the ticket sale trend would look like. We analysed the trend every few hours and very soon something alarming became apparent. More than 24 hours before the game the ticket sales were growing too fast. But this could mean only one thing, too many players, that means everyone on average will lose.
It was equally alarming to read the public forums and seeing how excited the general public was about the game and how they were steering into the abyss without even realising it. Lack of basic financial literary is the real pandemic.
12 hours till the game, it became obvious the game would be losing money, so we didn’t play. In the end, more than 500K tickets were sold, which is insane and very indicative of the irrational behaviour fuelled by COVID-19. People were chasing easy money, but the average return for the poor souls that did play was -25%.
Try doing that with a heat map.
Check out other decision making books
RISK-ACADEMY offers online courses
Informed Risk Taking
Learn 15 practical steps on integrating risk management into decision making, business processes, organizational culture and other activities!
ISO31000 Integrating Risk Management
Alex Sidorenko, known for his risk management blog http://www.riskacademy.blog, has created a 25-step program to integrate risk management into decision making, core business processes and the overall culture of the organization.
Advanced Risk Governance
This course gives guidance, motivation, critical information, and practical case studies to move beyond traditional risk governance, helping ensure risk management is not a stand-alone process but a change driver for business.
