The Logic of Risk Taking
I feel like this idea of 'tail risk' is pretty well understood in the gambling community, especially in the poker world of no-limit holdem tournaments.For example, everyone knows that pocket Aces are the best possible starting hand in poker, and the default strategy is to call any all-in call if you have them; your expected value will always be positive, no matter how many other people call or what they have.However, there is a well known exception to this rule, and many poker books talk about it - if you are the small stack at the final table, it might make sense to fold your pocket aces pre-flop if more than one larger stack has already called.The reasoning is that even if you win the hand, you aren't certain to move up in finishing position, which is what determines your winnings. On the other hand, if you lose the all in, you are CERTAIN to not move up. If multiple other people have already called the all-in, then there is a good chance that SOMEONE will be knocked out, moving you up in the finishing position without having to take a risk. Therefore, even if you have a positive expected return, it makes more sense to avoid the 'ruin' situation and fold the pocket aces.