Improve Your Risks By Betting On Outcomes
Avoid worry and waste by putting skin in the game
Hurricane Isaias is bearing down. August hurricanes are rare. Mild panic ensues. Communities board-up. Events are canceled. I race to the coast to repair a roof. I dash back to my inland home just as the storm bands start moving ashore.
Back home, I support essential services (infrastructure) in a nearby town. The infrastructure director, Mitch, is on his way to the emergency operations center. “It is going to rain more than six inches,” shouted Mitch. “We are closing down the Town! It is going to be a bad one!”
When you think in bets you can manage risk better. The bet forces you to really think about your personal loss and the source data associated with your perceptions. The bet also forces after-event reflection which is the basis of learning. All risk is personal.
The Bet
I like to keep side bets with experts as simple over/under bets. By the way, I use experts loosely as a category that includes subject matter experts, people in charge, and smart-ass friend. In the case of the hurricane, I made the over/under at four inches of rain in 24 hours. My proposal to take the under four inches was granted, of course, because Mitch was convinced it was going to rain at least six inches.
The Background Information
All background information is not the same, although the underlying data usually is the same. The data must be analyzed (usually in a model) and the results must be interpreted (usually be the analyst, then by some type of executive). An analysis is only as good as the analyst because all analysts make assumptions and use judgment. An interpretation is only as good as the interpreter. When the interpreter is some type of executive, they have something to gain or lose by the interpretation. Remember, all risk is personal.
Elected officials are overly cautious because there is a steep political downside for being wrong. The Weather Channel benefits from the hype, so a larger viewing area means more people tuning in and more advertising dollars. Plus, people remember when they are disappointed — I will forget that you predicted rain when it was sunny because I was happy but I will remember when you predicted it would be sunny and it rained because I was unhappy when my plans were ruined. Politicians and people who depend on happy customers have skin in the game. Remember, all risk is personal.
Experience with Betting
The sources of my experience with betting on the weather are from offshore sailboat racing and running a youth baseball organization. In both cases, there are conflicting perspectives that must be balanced. There are upsides and downsides each day with each weather forecast. You learn a lot about data, information, and interpretation from the feedback associated with those daily bets.
Baseball is the simple example where for five years, in spring and fall, it was my job to decide whether my large baseball league was going to play that night. Rainouts were bad because we did not have enough fields for make-up games. Plus, parents and coaches hated disruptions to their other scheduled events. If I called the games off and we could have played, it created a scheduling mess and I received a lot of complaints.
On the other hand, the minimum umpire fee was approximately $500. So, every time we tried to play but got rained out it cost us real money. Umpires complained too because a bad decision cost them a free night at home.
I had a bet every night. Skin in the game made me look deeper and to reflect on the after-event outcomes more. I learned because the risk was personal.
The Result
It rained 3.5 inches. I won the bet. I had dug deeper into the data. I had listened less to the hype.
I suspected that I could have set the over/under at 5 inches and Mitch would have taken it. I did not, in part because he could have made me take the over 5 inches and in part because I wanted to understand better how Mitch approached evaluating risk.
Learn by thinking in bets. And learn by making a few bets, too. All risk is personal.
