Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Why people make dumb financial decisions on purpose

awealthofcommonsense.com

Post reply on HN
Print view View original

61–70 of 170 posts

Re: Why people make dumb financial decisions on purpose

#61

Post by yjk »

horsawlarway wrote: post #47

Expected value doesn't mean jack shit if the game can only be played once. > Expected value (also known as EV, expectation, average, or mean value) is a long-run average value of random variables. If you can only press a button once - you should take the guaranteed money in almost all circumstances (assuming you have finances that look like most Americans - if you're already a millionaire... do what you want, this ga…

I'm not sure on your argument. I belive it's rational to make a decision that you would repeat every time you are presented with the decision, no matter if you knew beforehand how much times that decision would be presented to you.

Let's account for the marginal value of each dollar to set the number 50 to be some number that equated to triple the utility of the first million.

Why would it make less sense to choose the 50%? Assuming you would definitely take a 99.9999% chance of 50 million over 100% of 1 million, at what percentage do you switch over to the higher percentage?

Re: Why people make dumb financial decisions on purpose

#63

Post by BiteCode_dev »

Nassim Taleb famously destroys those lines of reasoning in his books: game theory is unpractical for most people, because it almost always ignore variables that don't exist in a lab but are crucial IRL.

Comments have been explaining which ones already apply to this article, I'm not going to repeat them.

But there is an another example from Taleb that always makes me smile:

- If the other player tosses a coin and gets 9 tail in a row, what are the chances of getting tail on the next toss?

- 50%!

- No, 100%. The other player is cheating.

Re: Why people make dumb financial decisions on purpose

#64

Post by paganel »

I still don’t get it how hitting the green button (50% at 50 mullion) is the “rational” choice, it isn’t. 1 million in your pocket, no matter what, is exponentially and life-changing (for the majority of us) better than a 50% of getting nothing. Maybe if the value behind the red button would have been smaller (let’s say $1000 or even $100) then things would have been different, but, again an $1 million in one’s pocket no matter what is life-changing for most of us.

Re: Why people make dumb financial decisions on purpose

#65

Post by phao »

BeetleB wrote: post #53
horsawlarway wrote: post #47

Expected value doesn't mean jack shit if the game can only be played once. > Expected value (also known as EV, expectation, average, or mean value) is a long-run average value of random variables. If you can only press a button once - you should take the guaranteed money in almost all circumstances (assuming you have finances that look like most Americans - if you're already a millionaire... do what you want, this ga…

> Expected value doesn't mean jack shit if the game can only be played once. Thinking like this was the mistake I've made. While you can play a given game only once, your life will have plenty of such games. So there definitely is a relevance to "expected value". And this is easily to simulate with a program. The expected value of the wealth for those who take the chance when the "local expected value" is better than…

> your life will have plenty of such games

What are you talking about? Which life will have plenty of such games? In what way is that true?

Re: Why people make dumb financial decisions on purpose

#66

Post by ghaff »

pnutjam wrote: post #43
derbOac wrote: post #22

Earlier quoted context omitted.

There's also "purely statistical" problems with the argument the 50 million at 0.50 probability is the better decision: it makes an erroneous ergodicity assumption. In other words, it assumes that the expectation of a one-shot decision over people is the same as it is for the decision within-person. Sure, if you were making the choice over and over and over again, it would be better to repeatedly hit the green button…

It's a classic spherical cow model. It has no bearing on reality, although this pay structure is becoming more and more common; albeit with less then 50% odds. How many companies have you seen with "contests" to get ideas or content. The vast majority of people end up with nothing.

>How many companies have you seen with "contests" to get ideas or content. The vast majority of people end up with nothing.

Yeah, but you see the same thing with giveaways at trade shows, for example. Even for a fixed giveaway budget, there's an argument to be made for having a drawing for a nice prize, rather than giving everyone some cheap swag.

Re: Why people make dumb financial decisions on purpose

#67

Post by mrwh »

horsawlarway wrote: post #47

Expected value doesn't mean jack shit if the game can only be played once. > Expected value (also known as EV, expectation, average, or mean value) is a long-run average value of random variables. If you can only press a button once - you should take the guaranteed money in almost all circumstances (assuming you have finances that look like most Americans - if you're already a millionaire... do what you want, this ga…

Agreed.

And well, if everyone played the game, then the population at large would still be better off taking the million. I can well imagine there being fewer social problems if we all get a million fun bucks versus half of us getting fifty million. But then that's a different effect kicking in.

Personally, a million would affect my life positively (I'd buy a house), 50 million negatively (I'd stop working).

Re: Why people make dumb financial decisions on purpose

#70

Post by paganel »

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?

Those 5 pounds also give you the opportunity to just dream a little once in a while, as in “what would I do with all the money if I really win?”, it’s like a drug, takes you out of your not-ok (from a financial perspective) life.
Post reply on HN