Hedges Are for Gardens

Choosing the least risky strategy, on a per-play basis, is often the worst strategy if you want to win the game. If you’re looking to score the most runs (or the most points or goals if we’re talking about a different sport), you can’t go around running scared. The right play is the return-maximizing play almost every time, even if it feels “too ri... See more

Now, I’m not saying that you should always make the riskier play. The essential thing about the riskier strategy isn’t that it’s riskier; the return is what matters.

Return scales linearly with the number of trials. Variance scales as the square root of the number of trials. The standard deviation of four trials is only double that of a single trial, but the return is four times as much. Things that feel more failure-prone simply aren’t over a large sample, at least as long as the return is there.

If I showed you a risk-free way to make a dollar, theory would tell you to replicate that exact trade a billion times. If I showed you a riskier way to make five dollars, theory would tell you to reject it in favor of the first trade and make up the foregone four dollars in volume.

But in the real world, that’s not how things work. As it turns out, ... See more