The generalized question is is it rational to invest in things with small chances of large payoffs. The answer is a qualified yes, given a few conditions.
You must have some expertise in the area you are investing in.
You must be young and thus have high risk tolerance.
You should not devote too large a fraction of your portfolio to this, despite above.
The pool of people who would devote a significant portion of a windfall to SENS or MIRI should be more risk tolerant in their investments than average.
According to the academic literature, the opposite is true:
“Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?” Antti Ilmanen
Financial Analysts Journal, September/October 2012, Vol. 68, No. 5: 26–36.
“The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered
positive long-run rewards in a wide range of investment contexts. Conversely, buying financial
catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun
rewards. Thus, bearing small risks is often well rewarded, bearing large risks not.”
People seem to overestimate events that are salient yet have small probability of occurring. The empirical evidence bears this out.
Investors tend to overestimate the odds of tail events, so selling insurance and lottery tickets is long-run profitable.
The generalized question is is it rational to invest in things with small chances of large payoffs. The answer is a qualified yes, given a few conditions.
You must have some expertise in the area you are investing in.
You must be young and thus have high risk tolerance.
You should not devote too large a fraction of your portfolio to this, despite above.
The pool of people who would devote a significant portion of a windfall to SENS or MIRI should be more risk tolerant in their investments than average.
According to the academic literature, the opposite is true:
“Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?” Antti Ilmanen Financial Analysts Journal, September/October 2012, Vol. 68, No. 5: 26–36.
“The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun rewards. Thus, bearing small risks is often well rewarded, bearing large risks not.”
People seem to overestimate events that are salient yet have small probability of occurring. The empirical evidence bears this out.
Investors tend to overestimate the odds of tail events, so selling insurance and lottery tickets is long-run profitable.