Practical Application
Many bets have the feature that payoffs and probabilities can change before the outcome is determined. In sports betting for example, the line may change several times before the event is held, and news may come out (such as an injury or weather forecast) that changes the probability of an outcome. In investing, a stock originally bought at $20 per share might be available now at $10 or $30 or any other price. Some sports bettors try to make income from anticipating line changes rather than predicting event outcomes. Some traders concentrate on possible short-term price movements of a security rather than its long-term fundamental prospects.
A classic investing example is a trader who has exposure limits, say he is not allowed to have more than $1 million at risk in any one stock. That doesn't mean he cannot lose more than $1 million. If he buys $1 million of the stock at $20 and it goes to $10, he can buy another $500,000. If it then goes to $5, he can buy another $500,000. If it goes to zero (as stocks sometimes do), he can lose an infinite amount of money, despite never having more than $1 million at risk.
Read more about this topic: Proebsting's Paradox
Famous quotes containing the words practical and/or application:
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