My first instinct here is TAXES. A progressive income tax further deflates the dollar value and utility of earning $50m. Plus, with $50m, I'd likely have to hire a tax professional and a lawyer - further degrading the happiness utility.
That wasn't the point of the question, but it is reality. For valuing the option value though, maybe you don't consider the taxes. There could always be a buyer with a >$50m loss who could make $50m tax-free, or someone making the choice in an IRA/tax-free account.
This is a terrific essay on using the Kelly Criterion for putting down a % of capital to invest in an asset. Funny how $20 can provide a sense of utility value (?) when investing in markets, options, and otherwise. Thanks for sharing this!
Ditto, for those old enough to remember the reference. Jay Leno heard that NBA player Charles Barkley bet on golf and asked him if he bet $20/hole. Barkley yelled "NO! What am I going to do with $20!"
This also brings out the aspect of risk engagement. For some people, betting $2 on a horse has utility because it's engaging. For others of higher net worth, it might take a bet of over $1 million, or perhaps over 10% of their net worth, to get the same sense of risk engagement (rush, fear, excitement, etc.). i.e.: for some people risk itself is a utility.
Probably missing something but if the option to press either the red or green button trades for $24m why wouldn't a risk neutral investor who knows they will press the green button in advance put in a bid greater than $24m but less than $25m?
My first instinct here is TAXES. A progressive income tax further deflates the dollar value and utility of earning $50m. Plus, with $50m, I'd likely have to hire a tax professional and a lawyer - further degrading the happiness utility.
That wasn't the point of the question, but it is reality. For valuing the option value though, maybe you don't consider the taxes. There could always be a buyer with a >$50m loss who could make $50m tax-free, or someone making the choice in an IRA/tax-free account.
This is a terrific essay on using the Kelly Criterion for putting down a % of capital to invest in an asset. Funny how $20 can provide a sense of utility value (?) when investing in markets, options, and otherwise. Thanks for sharing this!
Ditto, for those old enough to remember the reference. Jay Leno heard that NBA player Charles Barkley bet on golf and asked him if he bet $20/hole. Barkley yelled "NO! What am I going to do with $20!"
This also brings out the aspect of risk engagement. For some people, betting $2 on a horse has utility because it's engaging. For others of higher net worth, it might take a bet of over $1 million, or perhaps over 10% of their net worth, to get the same sense of risk engagement (rush, fear, excitement, etc.). i.e.: for some people risk itself is a utility.
I would sell the green button to a trading firm for $20m 😂
Probably missing something but if the option to press either the red or green button trades for $24m why wouldn't a risk neutral investor who knows they will press the green button in advance put in a bid greater than $24m but less than $25m?
i wasn't clear...i should have phrased it more as what does the green button trade for given that you are stopped out at being given the red button