Risk of Ruin
Risk of ruin is the probability of losing so much capital that you cannot continue, driven by sizing, variance, and costs.
Definition
Risk of ruin is the probability that losses reduce your capital to a level where you cannot continue trading or you cannot follow your plan. Ruin is often caused by position sizing that is too large relative to uncertainty and variance.
Why it matters
Prediction market outcomes are noisy, and costs are real. Even with a positive edge, aggressive sizing can lead to ruin because drawdowns arrive before long run edge can show up.
Main drivers
• Oversized positions relative to expected value and uncertainty.
• Hidden costs: trading fee, bid ask spread, slippage, and execution risk.
• Poor forecasting quality, such as overconfidence or weak calibration.
Common pitfalls
Chasing losses: Increasing size after losses is a fast path to ruin.
Ignoring break even: If you are not clearing break even probability after costs, ruin risk rises.