In my view one of the most important component of alpha generation (financial gambling) is weighting. How large to make your bets. Interestingly this is not often discussed in the class room or the board room. Valuation, timing, and strategy are discussed but when was the last time someone asked you what the geo-metric mean maximizing weight of your strategy was (if ever)? [An interesting side discussion is, 'is the reasons it is one of the most important components of alpha generation because it is discussed so little']. Also the formal designs of weighting are much less developed (or maybe it better to say much more complicated; even when it is a single strategy weight and not a strategy in the context of a portfolio) than valuation. But for the under use and difficulties that the sizing of bets entails it makes financial gambling much much easier than ‘life gambling’.
Consider that for a financial gamble you can scale it to your confidence, without (for most of us) having any impact on the market. In short the way you scale the bet doesn’t impact the way the bet turns out. On the other hand in life you can’t just scale the bets to confidence because how you scale the bets (which in this case I mean the effort/commitment that you put into an activity) changes the outcome significantly. Consider the realm of foreign policy if you think a foreign excursion (pays off 10:1) is worthwhile even given it only 20% chance of success. A PM (portfolio manager) would put on a weighted bet based on the payout but the statesman would have to calculate the weight that he was willing to commit (and at the same time) consider what they would be doing to the chances for success. A more challenging problem.
