[LINK] Bets do not (necessarily) reveal beliefs

When does a bet fail to re­veal your true be­liefs? When it hedges a risk in your port­fo­lio.

If this claim does not im­me­di­ately strike you as ob­vi­ously true, you may benefit from read­ing this post by econ­blog­ger Noah Smith. Ex­cerpt:

...Alex Tabar­rok fa­mously de­clared that “a bet is a tax on bul­lshit”.

But this idea, at­trac­tive as it is, is not quite true. The rea­son is some­thing that I’ve de­cided to call the Fun­da­men­tal Er­ror of Risk. It’s a mis­take that most peo­ple make (my­self of­ten in­cluded!), and that an in­tro fi­nance class spends months cor­rect­ing. The mis­take is look­ing at the risk and re­turn of sin­gle as­sets in­stead of to­tal port­fo­lios. Ba­si­cally, the risk of an as­set—which in­cludes a bet! - is based mainly on how that as­set re­lates to other as­sets in your port­fo­lio.