Comments on: Morris: How to Win Your Bonus http://mathfactor.uark.edu/2009/01/morris-i-want-my-big-bonus/ The Math Factor Podcast Site Fri, 08 Aug 2014 12:52:06 +0000 hourly 1 https://wordpress.org/?v=4.9.25 By: Stephen Morris http://mathfactor.uark.edu/2009/01/morris-i-want-my-big-bonus/comment-page-1/#comment-475 Tue, 31 Mar 2009 00:36:26 +0000 http://mathfactor.uark.edu/?p=399#comment-475 jyoak, that’s exactly the solution I had!
[spoiler] I didn’t spot that they can play the system by borrowing, no wonder we are all broke now! It seems that unless the risk/reward calculation is exactly the same for the brokers as for the company then they will always have a different angle.
The main problem is that they can only win a bonus, never lose one, whereas the company can win and lose.  So the expected result will always be distorted.
Actually I don’t think that is the main problem.  I think the only way for the trader’s interest to match the companies interest is if they are entirely independent, so the trader can make money when the company doesn’t.  
It seems perverse but seems to be true.  
It means we should be paying bonuses to succesful traders even when their companies have been bailed out by poor tax-payers like us! [/spoiler]

Can anyone see another way to make this work?

]]> By: jyoak http://mathfactor.uark.edu/2009/01/morris-i-want-my-big-bonus/comment-page-1/#comment-459 Sat, 21 Mar 2009 05:45:55 +0000 http://mathfactor.uark.edu/?p=399#comment-459 [spoiler] That’s cool.  So if you invest in C, 50% of the time the company makes $10,000 for $1000 in commissions or $10 each.  Your expectation is $5. If you invest in D, the outcomes are: 1: 12.5 % D loses, C loses. 2: 12.5 % D loses, C wins. 3: 37.5 % D wins, C loses. 4: 37.5 % D wins, C wins. The commission in each case is: 1: 0 (the company loses money) 2: 0 (the company makes money, but you aren’t eligible for a bonus) 3: 0 (the company loses money) 4: 10 Since this occurs only 37.5% of the time, the expectation is $3.75 . So what we really need to do to be smart is to discover not a different company that doubles more often, but how to borrow on margin.  Suppose you can double the amount you can invest at a cost of 10%.  You thus invest $200 in company C. It now looks like this: 1: 50% – you lose $210 for the company. (and everyone else loses $100) 2: 50% – you make $190 for the company (and everyone else makes $100.) Clearly this is worse for the company.  Instead of having zero expectation before bonus, you have -$10 for the company.  On the other hand, the company makes $10,090 when you profit.  This makes improves your commission to $10.09 when you win, or an expectation of $5.045 — an improvement! This is so smart to do, in fact, that you should tell the other 99 traders.  :-) [/spoiler]

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