A Fairy Tale

I’ve never been to Las Vegas, but I’ll be leaving the office in a bit over an hour to go for the weekend. So, naturally, I’ve been thinking about gambling. Or, in particular, the following “imagine if” scenario. Suppose I discover that my closet contains a mystical kind of roulette wheel with 1 billion possible outcomes. On 999,999,999 of those outcomes, the house pays you 1:1. But on the other outcome, you pay the house 2:1. If I’m a smart guy, I recognize that this is a bad bet. But, hey, there’s still a way to make money off of this. I just need to go rooting around in my dad’s house for a while, brush of my diploma, and declare myself a fund manager of some kind. Then I find some guy to give me money to invest in exchange for a small commission on his earnings. Then on Monday, I spin the wheel. If I win, on Tuesday, I “reinvest” and spin the wheel again. Wednesday, Thursday, Friday, ever day the same thing. Over the weekend, I hand him a bunch of money (less my cut) and show him a piece of paper with a bunch of funny equations squiggled on it, assuring him that this is my excellent quantitative model.

So he tells his friends, and next week I’m gambling with even more money. The week after that, the pot gets even bigger. The odds strongly favor me being able to place one bet every day for a whole year while winning every time. By then, my cut’s big enough that I can hire a bunch of subordinates — all smart guys who did well in the very best schools and who spend their time coming up with clever little stories and charts and figures to “explain” our sophisticated quantitative strategy. Our clients won’t understand what we’re talking about because, deliberately, it doesn’t make sense. And some will realize it doesn’t make sense and walk away — nothing wrong with that — but most won’t want to show ignorance by asking real questions and will be satisfied that my methods are getting results. And so they are! Along with hefty commissions.

One day, of course, I’ll hit the whammy and everyone’s money goes away. Except, of course, for my commission money which I’ve been investing in a broad stock index on a “buy and hold” strategy.