Asymmetric outcomes occur when the potential upside is much larger than the downside. So how do they work and why are they important in betting? Read on to find out.
What are asymmetric outcomes?
When the outcome of an event has two possibilities, an asymmetric outcome occurs when the potential upside (earning potential or return) is so much larger than the downside.
For example, a person attempting to make a viral video will generally either completely fail, causing the loss of the capital invested in creating the content, or succeed, achieving a massive return in revenue and social media following for the creator.
If the video fails to go viral the creator loses one unit of utility (the small cost of creating the video), if it succeeds then they gain a potentially limitless amount. There may be only a one in 1000 chance of the video succeeding but the upside of success outweighs the cost of failure by more than 1000.
In this case, even though the chance of success is tiny, it is still optimal for the creator to produce the content, since the payoff of one success far exceeds the cost of even a thousand failures. Author, trader, and statistician Nassim Taleb has covered the topic of asymmetric outcomes extensively:
“It is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. How frequent the profit is irrelevant; it is the magnitude of the outcome that counts.” – Nassim Taleb, Fooled by Randomness
Why do we chase betting success?
In some ways our content creator’s asymmetric outcome mirrors that of a prospective bettor. It is difficult to find a successful betting strategy or model, and time and resources (namely money) will be lost in pursuit of a viable approach.
However, the payoff of finding a sustainable edge, model, or strategy is huge – a potential income of a magnitude far greater than the cost of each failure combined. It’s arguably worth the small hits for the chance at the big breakthrough, which brings longer term betting success.
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