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Pascal’s Wager, a Vaccine and a Portfolio Hedge

 

There’s an example from the history books that will help to illustrate the risk / return tradeoff between two alternatives that may or may not come to pass.  It’s called Pascal’s Wager.  In the 17th Century, a young French philosopher named Blaise Pascal suggested that a rational person should absolutely believe in God and live as though God exists.  The stakes, Pascal said, were no less than a choice between an afterlife featuring an eternity of bliss and an afterlife featuring an eternity of perdition.  Although he almost certainly didn’t think this at the time, the thought exercise likely represented the beginning of what are now the contemporary fields of probability theory, decision theory and pragmatism.

 

It should be noted that the wager is presumptively Christian and monotheistic.  It only works if there is one God named Jesus Christ. It does not necessarily work if there are many Gods, nor does it work if the one and only God is Joe Pesci.  I digress, but logic and thoroughness require that we acknowledge that the assumptions used in Pascal’s model do not necessarily apply to the metaphor that follows.

 

Given the presumptively high stakes and the inherent uncertainty of the outcome due to the simple fact that the premise of the wager could not be verified either way, the proposition was spelled out roughly as follows:  God either exists or not and you must decide on whether or not you believe in God.  Since there are only two obvious alternatives, the wagerer is left with four possible outcomes:

 

  • God exists and you believe
  • God exists and you do not believe
  • God does not exist and you believe
  • God does not exist and you do not believe

 

Options 3 and 4 carry no afterlife consequences whatsoever.  If option 1 turns out to be true, however, then congratulations – you’ve just saved your eternal soul!  Conversely, if option 2 turns out to be true, well, at least you can safely sell your favourite parka once you’re on your death bed.

 

Here’s where it gets interesting.  The identical exercise can be applied, in principle at least, to other decisions in the here and now.  One is the Coronavirus vaccine (you can take it or not; and it either works or does not).  Another is the use of a portfolio hedge against a market bubble popping (you can either put a hedge on or not; the presumptive market bubble will either pop or it will not).

Depending on how everything plays out in the coming months, this may turn out to be an interesting and instructive case study.

 

 

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