Let’s say that you want to make some money at the horse tracks. The guy behind the booth gives you the following choice:
- The Bet. You can place a bet now, before the race starts, on the horse with, in your view, the best odds of winning.
- The Option. Instead of betting now, he will sell you an option. The option gives you the right to bet on any horse during the race, up until 5 seconds before the first horse crosses the finish line. However, there’s a small catch: everyone else who owns this option has the same right, and only 3 gamblers are allowed per horse during the race. If all the spots fill up, you simply get your money back. Further, each other gambler’s choice will be made publicly available to others during the race.
Most people, even if they don’t know much about horse betting, will rightfully think The Option is the way to go. No matter how much information you might have about each of the horses and riders before the race, the information you gather during the race is much more valuable. A top-ranked horse might break a leg, or its rider might trip up on the start. Even if you pick a favorite before the race begins, once it gets going and you see him lagging behind, the economic reality put in front of you will override your speculative capacities.
Continue reading It’s easier to play the option than the bet