Pages: [1] :: one page |
|
Author |
Thread Statistics | Show CCP posts - 0 post(s) |
Caliph Muhammed
Caldari Caldari Naval Criminal Investigative Service
|
Posted - 2011.08.23 23:31:00 -
[1]
Edited by: Caliph Muhammed on 23/08/2011 23:35:59
In real life there are laws that protect people on loan defaults and such. Not so in EVE.
One thing that i've noticed on the forums and in EVE is that when people ask for uncollateralized loans there is an expectation of a bigger interest rate.
Why?
There are two possibilites for an uncollateralized loan, either its a scam or its legit.
If it's a scam you won't get 1% interest let alone 15%.
If it's legit then you never needed the collateral to begin with.
The higher interest rate seems somewhat punitive and really only makes the honest trader pay for the inevitable dishonest one.
I can only assume it's used by some high finance investor mindsets that calculate their overall loans that succeed and how much they made.
In the grand scheme of things though it seems unworthwhile to make the distinction.
How many successful loans are passed on looking for a punitively higher interest rate?
How many unsuccessful loans were handed out in spite of higher interest rate promised?
|
Jerry Pepridge
|
Posted - 2011.08.23 23:36:00 -
[2]
interest rates scales with risk.
nothing new here champ. _________________________________________________
7 Easy steps |
Caliph Muhammed
Caldari Caldari Naval Criminal Investigative Service
|
Posted - 2011.08.23 23:39:00 -
[3]
Originally by: Jerry Pepridge interest rates scales with risk.
nothing new here champ.
But risk doesn't scale with interest. The risk is always 100%.
|
Atima
Minmatar House of Marbles
|
Posted - 2011.08.23 23:52:00 -
[4]
lets say 90% legit 10% scam. Would you rarther 5% interest rates or 15% interest rates? or does it not matter because you wont get 1% let alone 15% because they scam. derp.
|
Jerry Pepridge
|
Posted - 2011.08.23 23:53:00 -
[5]
Originally by: Caliph Muhammed
Originally by: Jerry Pepridge interest rates scales with risk.
nothing new here champ.
But risk doesn't scale with interest. The risk is always 100%.
then you should have no problems filling your latest bond at 0.1% for 100b then. _________________________________________________
7 Easy steps |
Caliph Muhammed
Caldari Caldari Naval Criminal Investigative Service
|
Posted - 2011.08.24 00:24:00 -
[6]
Originally by: Jerry Pepridge
Originally by: Caliph Muhammed
Originally by: Jerry Pepridge interest rates scales with risk.
nothing new here champ.
But risk doesn't scale with interest. The risk is always 100%.
then you should have no problems filling your latest bond at 0.1% for 100b then.
Would it fill any faster with 20% interest? I'd argue the more interest demanded the more likely the loan will default. Or in other words the larger the amount of interest attached to an uncollateralized loan, the higher the risk goes, above 100%.
|
Golkan
|
Posted - 2011.08.24 00:55:00 -
[7]
Edited by: Golkan on 24/08/2011 00:58:42 E = investment*interest*average_number_of_months*(1-probability_of_default) - investment*probability_of_default
if E > 0 invest else keep your money
As you can see if interest goes up, chances you make money in the long run goes up. If you think probability_of_default goes up when somebody offers bigger interest rates then consider that in the formula.
edit: This is a bit simplified because some people will default after a few interest payments but you get the idea.
- Golkan
|
trance atlas
|
Posted - 2011.08.24 03:20:00 -
[8]
Over 100% collateral is zero risk
Not sure how to post?
|
SkuxNZ
Blue Republic
|
Posted - 2011.08.24 06:41:00 -
[9]
Edited by: SkuxNZ on 24/08/2011 06:46:53 Edited by: SkuxNZ on 24/08/2011 06:43:15 While I've never invested in EVE, I do happen to understand (or at least think I do) how it all works.
If you can't understand the formula Golkan posted above, think about it like this;
Say 1 in 10 people that actually get their loan/bond filled default (ie scam). This rules out obvious scam attempts or people that you don't have faith in.
You're some big shot investor and you invest in 10 people, 100mil each, for two months each (keeping numbers simple).
- If they're all paying 5%/month and one defaults: +90 (interest) -100 (scam) = -10mil - If they're all paying 10%/month and one defaults: +180 (interest) -100 (scam) = +90mil
Obviously these numbers are all just examples and not based on any real data, similarly with the scam rate. The scam rate more likely comes down to each individual investor, some will never invest in loans without collateral (and thus they dont need such high interest to cover their potential losses), or have some other strategy to keeping it below 10%. Either way at the end of the day, higher interest = moar isks for doing nothing.
Edit: I also don't understand your 100% risk theory? 100% would imply that it's guaranteed to be a scam.
|
Kethas Protagonist
Protagonist Ventures
|
Posted - 2011.08.24 07:13:00 -
[10]
Originally by: Golkan Edited by: Golkan on 24/08/2011 00:58:42 E = investment*interest*average_number_of_months*(1-probability_of_default) - investment*probability_of_default
I'm actually still trying to wrap my head around this. I have two half-formed objections that I can't quite crystallize:
1) That equation only works if all the random variables are independent. They aren't. In particular, as "probability of default" increases, so does "interest."
That's not quite right. The only variable here is "probability of default" - unless we're talking about the entire MD loan market instead of one particular offering, in which case I think it's a correct objection.
2) "probability_of_default" isn't an independent random variable. It's either 100% or 0%.
... but to a nonparticipating observer, over multiple offerings, it acts like a random variable.
----------
I asked the exact same question (more eloquently, naturally) a while ago:
http://www.eveonline.com/ingameboard.asp?a=topic&threadID=1488836
You might be interested in reading the discussion. Basically: yes, we're all convinced it's the case that "riskier" offerings "should" offer a higher interest rate, but no, nobody has a solid game-theory answer as to why.
|
|
egola
Amarr
|
Posted - 2011.08.24 07:44:00 -
[11]
OP makes a good point but then you also realize that all it does is allow scam to be done at a lower interest rate, and realize that interest rate=/= scam rate.
you just gotta see the feasibility of the whole thing and either trust or distrust your gut instincts.
|
Tom Hagen
|
Posted - 2011.08.24 08:07:00 -
[12]
There is no way for me as an investor to be 100% sure about the loans I pick up on an individual basis. I can make calculated risks assesments over time and several bonds based on statistic. SkuxNZ have put it very neatly for you in his small math example (makes me glad to see, since I have my ISK with him :-).
One other thing thou.
The interest rates I deem acceptable are also closly tied to what I belive I can make on my own with the same amount of ISK. As such even 10% is a low return, but is somehow accepted as the norm in here and thus create a ceiling for me to work with. So I can take a low return and almost no work, or little work and a slightly higer return. In my perfect world I would want the interest to go up on colleteraled and uncollatirized loans. But as someone said, Supply and demand! and ISK is not in a short supply in here.
|
Tekota
The Freighter Factory
|
Posted - 2011.08.24 11:08:00 -
[13]
I think what you need to clarify is what we're talking about when we say "risk". At first glance we're talking "risk of scam, burnout, or bus" and arguably the risk of these happening is, like you say, unaffected by collateral (although it would reduce the profitability of scam).
However, what folks are really concerned with as risk is not scam, burnout, or bus but "what is the risk of me losing my cash?". An investor couldn't really care what happens to an investment, they care only about their cash. Collateral means that an operator could burn out, could scam, or could get hit by a bus and their cash is safe. (important caveat, depending on who's holding the collateral). It's for this reason that your mortgage rate is lower than your credit card rate - a mortgage company (in the abscence of a housing bubble burst) has their investment secured in the form of your home as collateral. A credit card company's only recourse is through the legal system - infinitely stronger than Eve's, but still much less guaranteed of total recovery. Their risk is higher - even though your risk of turning criminal, going off grid, or dropping dead is the same.
The other point is basic supply and demand. More people, for the above reasons, will be interested in a collateralised offering than an uncollateralised one. With more investors available the offerer can propose a lower rate and still find in this larger pool people willing to accept said lower rate. It's not so much lack of collateral forcing rates up but availability of collateral allowing for lower rates thanks to the wider audience. |
Abdiel Kavash
Caldari Paladin Order Fidelas Constans
|
Posted - 2011.08.24 11:18:00 -
[14]
Edited by: Abdiel Kavash on 24/08/2011 12:02:00
Look at it as a dice roll. If you roll 1 through 5, the investment closes succesfully and repays the promised interest. If you roll a 6, it defaults/scams.
For a (fully) collateralized investment, if you roll 1 through 5, you get (ISK invested) * (1 + interest rate) ISK back. If you roll a 6, you get (ISK invested) back. Therefore the expected value of your payout is:
1/6 * (ISK invested) + 5/6 * (ISK invested) * (1 + interest rate)
You can see that as long as the interest rate is any positive number, you end up gaining ISK.
However, if the loan is not collateralized, your payout is zero if you roll a 6. It is still the same if you roll 1 - 5. Now the expected value is:
1/6 * 0 + 5/6 * (ISK invested) * (1 + interest rate)
You can see that if the interest rate is lower than 1/5 (i.e. 20%), the expected payout is lower than the amount of ISK you invest - you end up losing money in the long term.
Obviously the minimum interest rate to expect profit depends on the actual probability of success (5/6 in the example), which is something you have to estimate yourself by examining the initial post and the investee's character. |
Golkan
|
Posted - 2011.08.24 14:32:00 -
[15]
Originally by: Kethas Protagonist
Originally by: Golkan Edited by: Golkan on 24/08/2011 00:58:42 E = investment*interest*average_number_of_months*(1-probability_of_default) - investment*probability_of_default
I'm actually still trying to wrap my head around this. I have two half-formed objections that I can't quite crystallize:
1) That equation only works if all the random variables are independent. They aren't. In particular, as "probability of default" increases, so does "interest."
That's not quite right. The only variable here is "probability of default" - unless we're talking about the entire MD loan market instead of one particular offering, in which case I think it's a correct objection.
2) "probability_of_default" isn't an independent random variable. It's either 100% or 0%.
... but to a nonparticipating observer, over multiple offerings, it acts like a random variable.
----------
I asked the exact same question (more eloquently, naturally) a while ago:
http://www.eveonline.com/ingameboard.asp?a=topic&threadID=1488836
You might be interested in reading the discussion. Basically: yes, we're all convinced it's the case that "riskier" offerings "should" offer a higher interest rate, but no, nobody has a solid game-theory answer as to why.
The only random variable is probability_of_default. average_number_of_months is simply the average number of payouts that have been done to date per uncollateralized bond and interest is set by the bond issuer.
The formula is a simplified model of uncollateralized bonds. The tricky part is how we evaluate probability_of_default. We can simply look at all uncollateralized bond offerings without discrimination and see how many default or we can try to refine our evaluation by breaking it up in a few categories (1st bond offer from unknown, 1st bond from old investor, 2nd bond, how old the character is, interest rate offer, etc). The problem if we break it up into categories is that we don't have enough data to collect to make reliable statistics.
The most important part of the evaluation of probability_of_default is to do it for intervals on interest rates that comes with roughly the same characteristics. I haven't compiled any data but I'd say the 8-12% interval has the same risk profile. Over that, probability_of_default might be higher and under that amount I don't think probability_of_default is lower.
|
OllieNorth
Gallente R-K Industries
|
Posted - 2011.08.24 16:05:00 -
[16]
Think of it like betting on a horse.
The ones most favored to win, everyone wants to bet on them, so the oddsmakers can offer lower odds (think returns). The less likely a horse is to win, (higher risk of losing your money) the better odds (higher returns) they have to offer to get people to bet on that horse.
Any debt-related transaction is simply a bet. The person loaning the money is betting on the borrower paying it back. The default laws in the real world only help to mitigate that risk, not eliminate it.
|
Cyniac
Gallente Twilight Star Rangers
|
Posted - 2011.08.24 17:08:00 -
[17]
Originally by: Caliph Muhammed There are two possibilites for an uncollateralized loan, either its a scam or its legit.
Not exactly you have several options:
1) It's a scam - you lose 2) It's a clever ponzi - you may win out if you invest early and cash out early (phaser inc style) 3) It's legit, but unsuccessful - you may not get the expected returns (but if covered by collateral you are totally or partially safe) 4) It's legit and functions as advertised - $$$$ to you
When you have an investment covered by collateral with a reliable third party (and third party scams are also possible) the risk of damage through scam is much lower. You may notice that loans covered by full collateral with a trusted third party are picked up very fast. Why? Because there is an excess of isk vs investment opportunities in EVE. (Wouldn't it be nice if we had more investment opportunities?)
In essence it's supply and demand driving this as much as anything. Demand is higher than supply for investment opportunities covered by collateral, therefore investors who want these receive less returns. Supply vs demand for investment opportunities not covered by collateral is much more unpredictable which is why investors demand (and usually get) higher interest rates.
|
Umad Bro Questionmark
|
Posted - 2011.08.24 19:08:00 -
[18]
People who have enough money to invest in here and the knowledge needed to make that money (no RMT) should stop being lazy idiots and get mouth-****ed almost every time when some dude or dudette runs off with all your money.
Is it THAT hard for you people to make a 10 percent monthly without asking for your money to be stolen? What the **** is the matter with you people?
Current state of the forums:
Making capsuleers slightly angry since 2003.
|
Dane El
|
Posted - 2011.08.24 20:42:00 -
[19]
My investing formula is simple: Don't, no exceptions.
I'm highly suspicious of anyone claiming to need isk to launch operations. It's so easy to generate huge piles of isk in Eve. If you haven't managed to collect a large pile of it yet, why should I trust you to be able to do it with my isk?
|
Kethas Protagonist
Protagonist Ventures
|
Posted - 2011.08.24 21:16:00 -
[20]
Originally by: Golkan The only random variable is probability_of_default. average_number_of_months is simply the average number of payouts that have been done to date per uncollateralized bond and interest is set by the bond issuer.
Nope.
1) If we're talking about a specific loan offering that's already been posted, then neither "probability of default" nor "interest" are random variables, or indeed variables of any sort. They're both set, and known, by the issuer.
2) If we're talking about MD loans in general, or, say, "the value this factor will take on the next offering on MD," then I'm not sure if it's correct to call "probability of default" and "interest" variables. They certainly aren't random. If I declare that, after having run long-run MD averages through the formula above, I deem uncollateralized offerings at X interest profitable on average, there will be a spike in scam offerings at or above X interest. That's not random.
|
|
Kethas Protagonist
Protagonist Ventures
|
Posted - 2011.08.24 21:19:00 -
[21]
Originally by: Dane El I'm highly suspicious of anyone claiming to need isk to launch operations. It's so easy to generate huge piles of isk in Eve. If you haven't managed to collect a large pile of it yet, why should I trust you to be able to do it with my isk?
|
trance atlas
|
Posted - 2011.08.24 21:58:00 -
[22]
Originally by: Umad Bro Questionmark People who have enough money to invest in here and the knowledge needed to make that money (no RMT) should stop being lazy idiots and get mouth-****ed almost every time when some dude or dudette runs off with all your money.
Is it THAT hard for you people to make a 10 percent monthly without asking for your money to be stolen? What the **** is the matter with you people?
I have x amount I do not cAre to try and make more/not enough eve time= I can make 4-10% on loans
|
|
|
|
Pages: [1] :: one page |
First page | Previous page | Next page | Last page |