T h e R i d d l e o f T h e C o r r u p t C a s i n o

Process uncertainty refers to the randomness inherent in the outcomes of a probabilistic system. For example, the outcome of a single coin toss is a form of process uncertainty.

Parameter uncertainty can lead to model risk, where our assumptions about the underlying process are incorrect, resulting in flawed expectancy estimates and subsequent poor decisions.

There are two types of edges, trades that we expect to be profitable: risk premia and inefficiencies.

For a strategy to have a positive expectancy, the expected value E must be greater than zero. If the expectancy is zero or worse, it’s not a game in our best interest to play.

The formula for calculating expectancy is:

It measures fluctuations in the returns of an asset over a specific period, with higher volatility indicating greater uncertainty due to a larger distribution of possible outcomes.