Why people make dumb financial decisions on purpose • Hacker News Board

Re: Why people make dumb financial decisions on purpose

#31

Post by [deleted] » Sat, Sep 03, 2022, 3:43 PM UTC

crazygringo wrote: post #16

_Algernon_ wrote: post #11

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.

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. [1] https://en.wikipedia.org/wiki/Marginal_utility

[deleted]

Re: Why people make dumb financial decisions on purpose

#32

Post by selfhoster11 » Sat, Sep 03, 2022, 3:45 PM UTC

agentwiggles wrote: post #21

Honestly I'd hit the red button. I'd rather take a guaranteed payoff of my mortgage and all other debt, with plenty left over for a few neat toys, than chance walking away with nothing.

Exactly.

I’m also quite puzzled that nobody mentioned yet that if you were offered a chance like this in real life, it would likely be the only time in your life that you get a chance like that. Unless you get a repeat, or you are rich, it would be foolish to not press the red button.

Re: Why people make dumb financial decisions on purpose

#33

Post by dazc » Sat, Sep 03, 2022, 3:47 PM UTC

tester756 wrote: post #17

dazc wrote: post #8

You 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

Indeed, I have an ongoing subscription with zero expectation of winning but I do sometimes enjoy thinking 'what if'.

Considering how much money I throw away on streaming subscriptions I barely use, books I never get beyond the first chapter of, food I buy that ends up in the trash, etc, it represents quite good value for money.

Re: Why people make dumb financial decisions on purpose

#34

Post by synu » Sat, Sep 03, 2022, 3:51 PM UTC

kwhitefoot wrote: post #26

> A 50% chance of winning $50 million would equate to an expected value of $25 million. No it doesn't. Statistics is the science of populations of events, expected value applies only if you have a sufficiently large population.

I see this is being downvoted for some reason, but I have the same question. I get that if you keep replaying the game the expected value materialises over averages, but if you have one chance it doesn’t sound right that you should expect 25M if the two outcomes are zero or 50M? And that this is so true and obvious that it is dumb to take the 1M?

Re: Why people make dumb financial decisions on purpose

#35

Post by tpmx » Sat, Sep 03, 2022, 3:52 PM UTC

dazc wrote: post #8

You 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?

These two situations (the linked one and the one you're describing) aren't really comparable in terms of probabilities.

Re: Why people make dumb financial decisions on purpose

#36

Post by mjdowney » Sat, Sep 03, 2022, 3:57 PM UTC

_Algernon_ wrote: post #11

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.

Hear, hear! Tired of seeing these tirelessly dumb takes about expected value theory's supposed flaws or its psychological dimension.

Poker players make bets based on bank roll size and very good understanding of expected value. They either use Kelly criterion[1] or develop competing heuristics for value at risk[2].

Plenty of areas where psychology adds an interesting human dimension to decision making, but this and other risk-neutrality scenarios are not part of this category!

[1] https://en.wikipedia.org/wiki/Kelly_criterion#Criticism [2] http://www.eecs.harvard.edu/cs286r/courses/fall12/papers/Tho...

Re: Why people make dumb financial decisions on purpose

#37

Post by dazc » Sat, Sep 03, 2022, 4:00 PM UTC

tpmx wrote: post #35

dazc wrote: post #8

You 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?

These two situations (the linked one and the one you're describing) aren't really comparable in terms of probabilities.

Yes, of course, but I'm mentioning an every day scenario as opposed to a hypothosis.

Re: Why people make dumb financial decisions on purpose

#38

Post by shapefrog » Sat, Sep 03, 2022, 4:01 PM UTC

kwhitefoot wrote: post #26

> A 50% chance of winning $50 million would equate to an expected value of $25 million. No it doesn't. Statistics is the science of populations of events, expected value applies only if you have a sufficiently large population.

Schrodingers cat is half alive.

Re: Why people make dumb financial decisions on purpose

#39

Post by egypturnash » Sat, Sep 03, 2022, 4:03 PM UTC

Surprise surprise, people are not perfect emotionless economic units!

I don’t think it’s a good look for the “Director of Institutional Asset Management at Ritholtz Wealth Management” to call perfectly sensible decisions by people whose net worth is many orders of magnitude smaller than his “dumb” just because he can afford to pass up a guaranteed million.

Re: Why people make dumb financial decisions on purpose

#40

Post by bluetomcat » Sat, Sep 03, 2022, 4:06 PM UTC

burntalmonds wrote: post #30

crazygringo wrote: post #16

Earlier quoted context omitted.

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. [1] https://en.wikipedia.org/wiki/Marginal_utility

It does mention it. "If you don’t have a dime to your name you should take the guaranteed million dollars all day, every day. But what if you have some money? What if you’re already a millionaire? At that level of wealth taking the 50/50 shot at $50 million might be far more tempting."

The takeaway is that a wealthier person can take greater risks without endangering their livelihood.

A wealthy person, could, for example risk buying an older used car that would potentially need costly repairs. In case it needs these repairs, they will suffer some financial losses but would still be able to derive utility from the car. In case it doesn’t need them, they get rewarded for the risk with a functional car that costs considerably less than a new one.

For a broke person the same decision is much harder. Not being able to repair the car would unlock undesirable 2-nd and 3-rd order effects, like, not being able to go to work.