Karel: Economic research concerning risk aversion

[Karel]

I am in the process of performing a scientific economic research concerning real-world risk aversion of individual people, for example investors on stock market or players of blackjack. I would like to make a pool amongst experienced blackjack players concerning their risk aversion. Any personal data will be strictly confidential. Anonymous response is welcome. I would very much appreciate answers e-mailed to [email protected]. (Posting here is also fine although it would not be anonymous.)

Concerning the risk aversion, please read the post ?Optimal bet sizing? under the ?Calculating ROR given Kelly fraction $p$? on the Theory & Math page. I am interested in the questions of

1) Used Kelly fraction given a defined bankroll for the player.
2) What proportion of player?s entire investment wealth is the starting bankroll. The entire investment wealth includes also illiquid assets, it is not just available cash-on-hand, however, one should subtract some necessary living expenses. In case the player has another job, nothing needs to be subtracted, and in fact some discounted portion of the current and future job income, excess of living expenses, should be added. I understand that the definition is perhaps somewhat vague, but an approximate estimate is fully sufficient. I?ll be happy to explain any details.
3) Due to practical constraints a pro player may be limited with the unit size, even though a higher unit size would be desired. In this case, please let me know if the desired unit size should be for example twice as large, since this is the relevant reference point for measuring risk aversion.

Note that all the numbers may be in relative terms, i.e., I do not need to know the actual absolute values.

I would like to thank in advance to all participants in this study. The results will be used solely for academic research purposes, measuring and estimating the proper risk aversion coefficient.

Sincerely,

Karel Janecek

[Mr. Lucky]

Your question may be geared more towards full-time pros, but I'm giving my response anyway. I'll jump straight to item 2 before explaining #1. My wealth? Aye! That's really not a factor in determining bankroll as I have none. Seriously. Other than blackjack winnings, I am worth nothing financially. I don't own, and my car is worth less than I owe on it. I do have a smal 401K plan that I no longer contribute to and is still losing money badly. My 401K plan plus the value of my car is less than my total debt (Reference the "AYE!"). My job earnings is just barely enough to pay my cost of living, blackjack expenses, and reduce my debt; There is no excess income. In other words, I live paycheck to paycheck. I'm hardly poor, but I don't have any wealth.

Then, how do I figure my blackjack bankroll? I'm one of those rare people that are somewhat successful at trying to build a decent bankroll from scratch. It's really simple. BR = BJ winnings less extra taxes from BJ winnings.

Now onto item #1. I don't normally think in terms of Kelly fractions. I think in terms of ROR, total current BR, resizing point, and risk of resizing. But, if you term full Kelly as 13.53% ROR, half Kelly as 1.83%, and quarter Kelly as 0.03%, I prefer one third Kelly, which is ROR of about 0.25% and very infrequent resizing. The reason for this level of risk is that my bankroll is going to be hard to rebuild, so I must keep it fairly conservative for a part-timer. The reason for the infrequent resizing is I (over)play the same local casinos over and over again. Suddenly changing bet schemes and then changing them again a couple weeks later can be problematic. Currently my ROR is about 1.5% (pretty much half Kelly), way higher then I'd prefer. I'm very close to having to drop my bets but now have virtually no way of doing this and still getting a playable game. Therefore, I may have to go to plans B or C and get someone to finance me part way so I don't have to resize or move to more fertile BJ soil. So I'd gues you'd say I play one third Kelly and resize just past one half Kelly.

As far as item #3 goes, even with the fact I'm close to having to drop my bet levels when and if I more than recover, I'm fairly set at my current betting level due to both table max. and casino tolerances. So, bankroll rejuvenated and providing, I am restricted to my current betting levels as long as I stay playing my current casinos. And still being allowed to play these places for a while longer is in huge doubt, but that's another topic entirely.

I hope this provides some useful data, and I'm looking forward to reading your results and analysis.

[Karel]

My question if not geared just to full time pros, it is related to anybody who is able to take risks, and is in the process and has some experience in risk taking. In particular, the relevant issue for these pages is blackjack.

If I understand you correctly, if you were to lose your current bankroll, then it would be very hard, if not impossible, to form a new bankroll. Possibly over time. In this case, it appears that 1/3 Kelly is not that far from your actual (wealth-based) risk aversion. Your risk aversion is probably smaller than 1/10 Kelly.

I must say that, based on the results I have received, this is rather extremly low risk aversion. Most pro BJ players have higher risk aversion than 1/40 Kelly, often in the range of 1/100 Kelly. However, I have not received many responses, so my numbers are statistically very weak.

Anybody willing to submit completely anonymous response to this pool and help a non-profit scientific research, you may do so on [email protected].

Thank you,

Karel Janecek

[Mr. Lucky]

1/3 Kelly is my actual wealth-based risk aversion, and no it is not very risk averse if you think in terms of total wealth. And, no, I can not replenish my bankroll or supplement it with outside income. However, I am not like most pros who have worked most of their lives to build that wealth - house, retirement fund, college fund, etc. If they lose a significant portion of their wealth, it will affect their lifestyle quite a bit. My entire wealth (actually more than my entire wealth) is my totally unspent BJ winnings. Losing a significant portion of my wealth, even 100% of it, will not affect my lifestyle one bit. That's one reason why I like to think of BJ bankroll as just winnings minus taxes.

Also, should I get fairly unlucky and lose my entire bankroll, I can always join a team if I wish.