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 and the math.
Well, another big game was yesterday.
We did the usual math and oh crap, the expected return was negative this time. That was an unfortunate surprise, as we were waiting for this game for months and were very excited. It turns out the lottery operator changed some of the game parameters.
In fact we tested few different strategies, all showed negative expected return given the assumptions we were making. Crisis generally makes people blind to risk and it was exciting to see how we recalculated few times, hoping to find the justification to play. But there was none.
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There was 90% probability of losing around 30% of the cost with almost no upside. As always the biggest assumption was how many other people will play and it took considerable willpower to not fall into a cognitive bias and model more optimistic assumptions. We held the nerve and stayed conservative. Making this a clear decision for us – no bet. This is quality decision making.
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.
So in the end, we did overestimate the number of actual players and if we were to play using our strategy we would’ve made 0,2% profit after taxes (basically break even) but many people have lost, a lot. I did individually place a small high risk bet in case we overestimated one particular assumption and there was some upside to capture. Lost 50%. No hard feelings it was a risky bet to begin with.
Try doing that with a heat map.