LTCM founder: SBF’s lack of risk aversion led to FTXDM implosion

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LTCM founder: SBF’s lack of risk aversion led to FTXDM implosion

Victor Haghani, one of the founding partners of LTCM, applied the economic theory of choice under uncertainty to try and explain how FTXDM crumbled to the ground. 

In layman’s terms, “choice under uncertainty” means that you have to make a decision, but you’re not sure what will happen as a result of your choice. The theory posits that, in that instance, you will choose the option that maximizes the expected utility rather than the expected wealth.

Going against the sane

Here is a good example of choice under uncertainty:

Let’s say you discover an investment with a 98% chance of going to zero and a 2% chance of 10,000x ROI. Most wealthy people would choose to invest between 0.1% – 1% of their wealth in this investment because it is a reasonable thing to do. Not SBF, though.

“Yeah. I think the way I saw it was like, let’s maximize EV: whatever is the highest net expected value thing is what we should do. As opposed to some super sublinear utility function, which is like, make sure that you continue on a moderately good path above all else, and then anything beyond that is gravy.”

Victor Haghani, LTCM founder. 

Haghani relates this theory to SBF’s appetite for risk. He says Bankman-Fried made his investment decisions “as though he had no risk aversion.” In the example above, SBF would choose to invest 100% of his wealth in that investment because it maximizes the expected wealth.

Your money is safe with us!

The Bahamas Securities Commission has confirmed that financial information about the fallen FTX exchange can now be legally shared with debtors in the US. The Commission also revealed that it holds $3.5 billion worth of confiscated FTX Ventures assets. 

The assets were transferred onto digital assets held by the commission on Nov.12, 2022, for ‘safekeeping’ investors don’t know how to feel about this new information. 

According to the press statement given by the commission, FTX Digital Market (FTXDM) was under a string of cyber attacks that locked employees out of the FTXDM Amazon Web Server. 

At the risk of losing all the remaining digital assets, the commission obtained a court order to safeguard the remaining digital assets by transferring them to crypto wallets that the commission controls.

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Wayne Jones

Wayne is an all-rounded cryptocurrency writer who has written for several publications in the fintech industry. Having graduated from the University of Essex Colchester, he developed a passion for blockchain technology and has been curious about how the blockchain can modify the traditional financial industry.