81–90 of 170 posts
If there's multiple players with these buttons the optimal strategy is to pool your resources and distribute the winnings evenly. Teamwork makes the dream work.
The rational behaviour is to make everyone press the green button and then give away a million dollars to anyone who didn't get a prize but the obvious problem is that no such thing happens. Instead of cooperating some people insist on getting the full 50 million dollars as if they deserve it and were destined to get the money while the plebs who didn't get anything also deserve to stay poor. In other words, the prob…
The response I saw on Twitter that made the most sense: “sell your button press for $5 or 10 million to a person who has $100 million”
Now I'm wondering what the expected value is if you were to auction this button pressing opportunity. Intuitively it seems to be over $1m (and less than $25m) so if I'm right then that's better than pressing the red button.
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.
I wouldn't, because I can likely pay off my mortgage without it and still have money left over for some toys. My mortgage isn't a big burden. But I can understand it for folks who can't save much due to a mortgage. The problem with the scenario is that the disparity is so high: $1M vs expected value of $25M. 50% is high enough that for people like me, it's clearly a green button option. But how about this: Guaranteed…
And you can scale the numbers up or down and at some point almost everyone will choose red or choose green respectively.
The response I saw on Twitter that made the most sense: “sell your button press for $5 or 10 million to a person who has $100 million”
Now I'm wondering what the expected value is if you were to auction this button pressing opportunity. Intuitively it seems to be over $1m (and less than $25m) so if I'm right then that's better than pressing the red button.
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.
Earlier quoted context omitted.
In the way that these are analogies for actual situations, not just pure whiteroom thought experiments.
I suspected that much (that it was an analogy for some kind of actual situation). But what situation? How is it that a person's life has many of these chances in large enough volumes to make expected values worth it?
Every spot in life that you encounter that can be seen purely from an EV perspektive should be played as that. Only exceptions are longtail ruinous outcomes, like House Fire insurance, Health Insurance. Thats why in many western nations these types of insurances are mandatory.
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…
This is a key observation in more practical concerns like retirement planning. Often, maximizing expected value isn't actually what you want. For somebody with a comfortable retirement portfolio you care a lot more about not running out of money than ending up with a huge amount when you die. So you'll choose strategies that might have worse expected values but limit the frequency of worst case scenarios.
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 pocke…
The author’s point is that the simplistic understanding of expected value isn’t always wise.
The audience is economists who use the economic equivalent of perfectly spherical cows and then wonder why their model isn’t all that good.
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…