Elm Wealth: A Missing Piece of the SBF Puzzle
The swift collapse of cryptocurrency brokerage FTX and the loss of billions of dollars has brought to mind other major financial drops. Behind the swift rise and fall of this firm is its co-founder, Sam Bankman-Fried.
Living larger than life, the once-billionaire was a regular feature at a number of prominent conferences. He gave copious interviews. And he worked to cultivate the image of being the world’s most generous billionaire.
The reasoning behind that? A view held by Bankman-Fried that he should always act to maximize expected value.
Rather than consider risk-aversion practices, that means to always swing for the fences. Consider an event that has a 1 percent chance of happening but has a 10,000 percent payoff. If you’re maximizing expected value, that means you take that bet every time.
That’s in contrast to maximizing utility. As one grows wealthier, typically they take on less risk. Older investors who need more certainty in their portfolios lighten up on volatile stocks to buy fixed-income positions.
In the real world, investors need to consider their risk aversion. It may make sense for an aggressive investor to invest 1 percent of their wealth in the 10,000 payoff. But not all of it.
Yet in interview after interview, that’s how Bankman-Fried described his worldview. And it worked. Until it didn’t.
