The nature of capital and income

Bibliographic data

Monograph

Identifikator:: 102659555X

URN:: urn:nbn:de:zbw-retromon-82920

Document type:: Monograph

Author:: Fisher, Irving http://d-nb.info/gnd/118533541

Title:: The nature of capital and income

Place of publication:: New York

Publisher:: The Macmillan Company

Year of publication:: 1923

Scope:: XXI, 427 Seiten

Digitisation:: 2019

Collection:: Economics Books

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Document type:: Monograph

Structure type:: Chapter

Title:: Part III. Capital and income

Collection:: Economics Books

THE RISK ELEMENT §5 The main application of risk to capital valuation is, however, not to the rate of interest, but to the income , items themselves. To this application we now address ourselves. Let us begin by considering the case in which the element of discounting is wholly absent. The simplest case is that of ordinary gambling. If one invests in a lottery ticket where there is one chance in ten of drawing a prize of $50, it is evident that the price of the ticket must be considerably less than $50, which is the income . it may yield. Mathematicians have called the product of the prize multiplied by its probability, the ‘“math- ematical value’ of the chance. In the present instance this “mathematical value” will be $50 x 5, or $5. If a professional gambler should always pay the mathe- matical value of the chances, he would, in the long run, probably come out about even, as is well known from “Bernoulli’s Theorem.” Thus, if he continued to try for such $50 prizes, paying each time $5, he would probably win about one time in ten. In a thousand trials, there- fore, he might expect to win 100 times, spending $5 each for his 1000 tickets, or $5000, and receiving $50 each for his 100 prizes, or $5000. But the actual price which one will pay is not necessarily the mathematical value of the chance. It may be higher ; it is usually lower. The gambler is usually a person who will pay more than the mathematical value of the chance. At Monte Carlo, the “bank” makes its profit in this way, although its victims know full well that they are paying more than the mathematical value of their chances.. The consequence, of course, is ruin to most of them. Fortu- nately, persons who deliberately gamble are in most com- munities in the minority. The ordinary man 1s unwilling to pay even the full mathematical value of the chance. He is reluctant to assume any risks, and is, on the

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