Right, you see that girl over there, the one in that group that keeps looking right at you?’…’Right, let’s say I’m convinced she’s wearing black knickers – she looks like a black knickers kind of gal to me – and I’m so sure that’s what she’s wearing, so positive of that sartorial fact, I want to bet a million dollars on it. The trouble is, if I’m wrong, I’m wiped out. So I also bet she’s wearing knickers that aren’t black, but are any one of a whole basket of colours – let’s say I put nine hundred and fifty thousand dollars on that possibility: that’s the rest of the market; that’s the hedge. This is a crude example, okay, in every sense, but hear me out. Now if I’m right, I make fifty K, but even if I’m wrong I’m going to lose fifty K, because I’m hedged. And because ninety-five per cent of my million dollars is not in use – I’m never going to be called on to show it: the only risk is in the spread – I can make similar bets with other people. Or I can bet it on something else entirely. And the beauty of it is I don’t have to be right all the time – if I can just get the colour of her underwear right fifty-five per cent of the time I’m going to wind up very rich…
Right, you see that girl over there, the one in that group that keeps looking right at you?’…’Right, let’s say I’m convinced she’s wearing black knickers – she looks like a black knickers kind of gal to me – and I’m so sure that’s what she’s wearing, so positive of that sartorial fact, I want to bet a million dollars on it. The trouble is, if I’m wrong, I’m wiped out. So I also bet she’s wearing knickers that aren’t black, but are any one of a whole basket of colours – let’s say I put nine hundred and fifty thousand dollars on that possibility: that’s the rest of the market; that’s the hedge. This is a crude example, okay, in every sense, but hear me out. Now if I’m right, I make fifty K, but even if I’m wrong I’m going to lose fifty K, because I’m hedged. And because ninety-five per cent of my million dollars is not in use – I’m never going to be called on to show it: the only risk is in the spread – I can make similar bets with other people. Or I can bet it on something else entirely. And the beauty of it is I don’t have to be right all the time – if I can just get the colour of her underwear right fifty-five per cent of the time I’m going to wind up very rich…
