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Author: Grahamified One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 297  
Subject: Risk Premium a la Buffett Date: 7/1/2000 1:23 PM
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The following sort of problem is increasingly fascinating to me, perhaps because it constitutes a profitable, prudent kind of thinking to which I'm not predisposed...

In Roger Lowenstein's excellent "Buffett --The Making of an American Capitalist", there is a passage which reads as follows:

"As Buffett liked to relate the [insurance] business to poker, it is illustrative to consider his response to an actual wagering proposition. Every other year, he got together with Tom Murphy, Charlie Munger, and some other pals for a golf and bridge weekend in Pebble Beach, California. The men did a lot of betting, and at one session, in the early eighties, Jack Byrne, the GEICO chairman, proposed a novel side bet. For a "premium" of $11, Byrne would agree to pay $10,000 to anyone who hit a hole-in-one over the weekend. Everyone reached for the cash --everyone, that is, except for Buffett, who coolly calculated that, given the odds, $11 was too high a premium. His pals could not believe that he --by then, almost a billionaire-- would be so tight and began to razz him for it. Buffett, grinning, noted that he measured an $11 wager exactly as he would $11 million. He kept his wallet zipped."

In another section of Lowenstein's book, he quotes National Indemnity's Jack Ringwalt, whom Buffett greatly admired and who profoundly observed, "There is no such thing as a bad risk. There are only bad rates."

Both of these quotes obviously allude to the same fascinating principle, but I wonder how this principle would best be mathematically represented. Any thoughts?
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