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The Casino Illusion
Why the American financial system looks so much like a casino these days
I used to design and code up retirement simulators at a prior job. The point of the simulation was to make a realistic forecast of how much money you might have in retirement so that I could calculate your probability of retiring successfully, a.k.a. successfully meeting all of your stated retirement expenses and goals. To do this, I would run numerous simulations (Monte Carlo) of your future wealth both up to your retirement and during your retirement years, and see how often in those situations you ran out of money before you passed away (yes it was kind of morbid).
While messing with the inputs one day, I remember the simulator producing a really counterintuitive outcome. I thought it was a bug at first and checked and rechecked the calculations — there was no mistake. The counterintuitive outcome that I ran into was that when your retirement goals are very high relative to your assets and income, massively increasing volatility actually increases your albeit small probability of hitting those goals. Even in cases where the portfolio’s expected return dropped significantly, introducing highly volatile investments to the portfolio increased the probability of a happy retirement from 0% to something like 5% to 10%.