There's diminishing returns on the utility of money. If you're living paycheck to paycheck that guaranteed million is gonna give you a higher expected return of utility than the next 49 million combined. I disagree with the title calling it a "dumb" financial decision. It can be perfectly rational to take the million.
Why people make dumb financial decisions on purpose
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Re: Why people make dumb financial decisions on purpose
#12This is a nice concrete refutation of the fallacious reasoning in Pascal’s Mugging [0]. You can take this argument to its absurd conclusion by setting probability p arbitrarily small and the payout X arbitrarily large, such that p*X is arbitrarily greater than $1M, e.g. a 1/100000 chance of winning 100 trillion dollars.
Re: Why people make dumb financial decisions on purpose
#13You can witness people buying lotery scratch cards every day in the UK and wonder why people are so dumb given the odds of actually winning a big prize. But then bear in mind that this person maybe has a big bill to pay and only £5 to their name, do they keep the £5 knowing that it isn't going make any difference or take a wild chance that will?
I once was down to my last dollar, and I bought my one and only lottery ticket ever. What could it hurt? I couldn't do anything to help myself with one dollar. I lost.
Re: Why people make dumb financial decisions on purpose
#14[deleted]
Re: Why people make dumb financial decisions on purpose
#15I don't know how that article is written without mentioning utility theory in economics and the concept of diminishing marginal utility of money and the risk aversion it implies. No need to even bring in behavioral economics. https://en.wikipedia.org/wiki/Risk_aversion
Agreed. The article claims the scenario is “mathematics vs circumstance”, but really it’s really naive math vs math which takes into account the nonlinear utility.
Re: Why people make dumb financial decisions on purpose
#16There's diminishing returns on the utility of money. If you're living paycheck to paycheck that guaranteed million is gonna give you a higher expected return of utility than the next 49 million combined. I disagree with the title calling it a "dumb" financial decision. It can be perfectly rational to take the million.
Exactly. The fact that this article doesn't even mention the concept of marginal utility, and acknowledge that it's mathematical rather than "psychological", is borderline irresponsible.
Re: Why people make dumb financial decisions on purpose
#17You can witness people buying lotery scratch cards every day in the UK and wonder why people are so dumb given the odds of actually winning a big prize. But then bear in mind that this person maybe has a big bill to pay and only £5 to their name, do they keep the £5 knowing that it isn't going make any difference or take a wild chance that will?
I call it
a small price for a dream / what if mood
Re: Why people make dumb financial decisions on purpose
#18It's a catchy headline, but the "decisions" used as examples, aren't really "dumb" under the complete set of facts. Really, what this is about is that the typical mathematics used to discuss a certain type of financial decision (mostly things like investments) uses an incomplete model that doesn't consider appropriately the actual values involved -- for example, failing to consider the wildly nonlinear curve of the m…
It's just a bad title. Choosing a guaranteed 1M instead of a 50% chance at 25M isn't particularly dumb. "Dumb" decisions might be playing the lottery, or spending a windfall instead of saving it. But even those dumb decisions have reasonable psychological underpinnings for the person doing them.
> psychological underpinnings
Another example of a 'dumb' decision: torpedoing a career to preserve relationships.
My prospects are abysmal, my savings insufficient and I'm still dysfunctional, but I'm better off than I would've been in many ways if I had not decided to give my loved ones (and my mental health) higher priority. I like to think I can make a comeback one day, but it's okay if I don't.
Re: Why people make dumb financial decisions on purpose
#19"A 50% chance of winning $50 million would equate to an expected value of $25 million." If you hit the green button you either get $50 million or 0$. Hitting the red button gives $1 million. Unless you don't want $1 million or don't need it, you're going to hit the red button and not the green button.
If you have $100 million to your name, it'd be smarter to hit the green button. It really depends on what you're starting with.
Re: Why people make dumb financial decisions on purpose
#20Because people dont care about money if their life has no happiness or purpose in the first place