Russian Rolette

Russian roulette is a game of chance where you apparently have a one in six chance (17%) of dying. But if you keep on playing you have a 100% chance of dying. The best strategies to win a Russian roulette game are:

1. do not play

2. change the rules

There are a lot of situations in life and investing that have Russian roulette rules, but a lot of people choose to play by those rules and lose in the end. How can you identify those situations where the only way to win is to not play?

Ergodicity

The answer is this idea from mathematics called Ergodicity which is best explained with an example: Let's say 100 people go to a casino and 99 of them win a 50% return on their money, but one of them will lose and go bust. On average, you can calculate that you have a 99% chance to win a 50% return a day.

Now let's flip this see what happens when applying the same rules to only one individual: one person goes to the casino 100 days in a row. Every day she wins a 50% return on her money and makes a fortune. But if she goes on for 100 days there is a 100% chance that she will lose all her money.

This situation is non-ergotic, because the individual, over time, does not get the average outcome of the group. If you ever identify a situation as a non-ergotic then the best thing is to stay away and not participate in it.

To identify an ergotic situation is to make sure you get the same result for:

1. one individual over time

2. a group of individuals at a single point in time

If you want to not die or go bankrupt, ergodicity is an important idea to understand.

In investing, this idea translates to never bet all your money on a single stock, because there is a chance you will lose all your money.

Diversification

The antidote is to change the rules. Diversify your investments, your income sources, your friends. Because, you, as an individual, over time, will 100% lose one of them ( one stock will go bust, one income source will end, one friend will move away).