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1) Risk is weird! It's hard to think about well. But it's really important to.

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2) This thread is not exhaustive. It's also not investment advice, or risk advice, or advice at all; you do you.

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3) There are 2 types of risk: a) existential risk: the risk that youblow out or inhibit your ability to continue b) other risk: risk where you're not at risk of seriously impeding your ability to operate. By "risk" I mean "risk after EV". Burning $ isn't "risky", it's bad.

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4) EXISTENTIAL RISK IS BAD. REALLY BAD! You don't want it. Now 0 isn't really a number when it comes to risk, maybe asteroids will come as we'll all lose all our money (and bodies and shrubbery). But "really fucking low" is.

1:56 AM · Aug 29, 2020Twitter Web App

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5) Non existential risk is..... different. a) One view: it doesn't matter much, you win some you lose some. Again here "risk" means "0 EV risk", so upside is as big as downside b) Another view: sure but if you lose a lot of them then you're back at existential risk

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6) So, ok, where does this leave us? Well it means that other risk matters to the extent, but not as much. So how much?

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7) Here we get to the key point. EV IS LINEAR RISK ISN'T LINEAR. RISK IS SQUARED.

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8) Winning $3 is 3X as good as winning $3. Risking $3 is _more than_ 3X as bad as risking $1. In fact it's *9x* as bad. (Assuming law of large numbers.) Why? Well say you have EV = +1 and risk = 1. Then you do that 25 times. You now have EV = +25 and risk = 5 (!!!).

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9) That's how gaussians add. And if you have enough things without wacky tails, that's how _anything_ adds. This is equivalent to: variance goes as sqrt(time). So the real cost you pay to risk is the square of the risk.

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10) What does that mean? It means that EV / RISK is not the right metric. EV / (RISK * RISK) is. (Unless you're making many bets at once and RISK is correlated between them, in which case you add the RISK!!!)

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11) So risking 10% of your stack isn't 1/5th as bad as risking 50% of it is. Risking 10% of your stack is only 1/25th as bad. That's a lot less bad! BUT REMEMBER EV IS LINEAR. "RISKING" 10% IS REALLY BAD IF YOU'RE DEFINITELY GOING TO LOSE EACH TIME!

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12) Anyway, I'm not commenting on specific situations, all I can say is that if Alameda _were_ to yield farm: 1) it would bear the risk 2) it would make sure the risk wasn't anywhere near close to in the realm of existential

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Really interesting dynamic here with @SBF_Alameda going full degen yield farming. Just eyeballing the account it seems like at one point between 20-30% of the entire AUM of Sushi was coming from an account associated with @FTX_Official . Which kind of begs the question…

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13) Here's another way of looking at it. What's the max % of your portfolio you'd put into YFI/LEND/COMP/SNX/etc.? Those were worth < 10% recently, they definitely could maybe go back. If you'd put more than 1.1% in them, you're willing to risk more than 1%.

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14) So anyway the moral of the story is: DON'T "RISK" 10% OF YOUR STACK IF IT'S NOT SIGNIFICANTLY POSITIVE EXPECTED VALUE. AND IF YOU THINK IT IS, IDK MAYBE IT ACTUALLY ISN'T. STAY SAFE KIDS

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