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CronoDAS comments on When the uncertainty about the model is higher than the uncertainty in the model - LessWrong
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Comments (78)
The market can stay irrational longer than you can stay solvent.
In this case you don't have to wait for the market to become rational. If the options are mispriced, you will be able to realize your (statistically expected) gains at the expiration.
Financial instruments that expire (like options or, say, most bonds) allow you to take advantage of the market mispricing even if the market continues to misprice the securities.
True, but if most of your statistically expected gains comes from rare events, you can still go broke before you get a winning lottery ticket, even if the lottery is positive expected value. I have no idea if there are any real-world financial instruments that work like this, though.
True -- that's why risk management is a useful thing :-)
And yes, options are real-world financial instruments that work like that.