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

Re: Why people make dumb financial decisions on purpose

#91

Post by ajuc » Sat, Sep 03, 2022, 5:30 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."

"You should only gamble with money you don't need." Which most people already know.

Re: Why people make dumb financial decisions on purpose

#92

Post by anigbrowl » Sat, Sep 03, 2022, 5:30 PM UTC

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…

EV is such a nonsense measure anyway once you step outside the realm of pure theory.

For example, the EV in this example (50% chance of $50m, or $0) is $25m. The EV of a 2.5% chance of $1 billion is also $25m, but your probability of getting nothing is 20 times higher. Is it more rational to choose this over the certainty of $1m? I don't think so. Is it rational to chose a 0.0025% chance of $1 trillion over $1m? At that point I think even the most avowedly rational economist would choose the cash.

Re: Why people make dumb financial decisions on purpose

#93

Post by ghaff » Sat, Sep 03, 2022, 5:33 PM UTC

Bootvis wrote: post #52

jstanley wrote: post #50

Earlier quoted context omitted.

> that first million is far more impactful than the next 49. This is in fact the reason you should take the million. How many times you get to play the game is irrelevant. Your whole life is filled with potential but uncertain payoffs, and you should maximise expected utility every time (where utility is not the same as dollars).

No it’s not, if you play the game 20 times you’re almost certain to win 50 million and probably a lot more. Unless your utility function is flat after 20 million it does matter.

It's an interesting question (assuming you know the number of times you get to play up front).

In reality, with these numbers, the best strategy for most people who aren't already very wealthy would probably be to get a sure-fire nest egg and then play the odds.

If you have to play the same every time, I'm not sure. Again, with these numbers, the utility function is looking pretty flat after $20 million for the vast majority of people. And "almost certain" != certain.

Re: Why people make dumb financial decisions on purpose

#94

Post by anigbrowl » Sat, Sep 03, 2022, 5:34 PM UTC

Bootvis wrote: post #52

jstanley wrote: post #50

Earlier quoted context omitted.

> that first million is far more impactful than the next 49. This is in fact the reason you should take the million. How many times you get to play the game is irrelevant. Your whole life is filled with potential but uncertain payoffs, and you should maximise expected utility every time (where utility is not the same as dollars).

No it’s not, if you play the game 20 times you’re almost certain to win 50 million and probably a lot more. Unless your utility function is flat after 20 million it does matter.

if you play the game 20 times you’re almost certain to win 50 million

You can get any result you want if you just rewrite the problem conditions ◔_◔

Re: Why people make dumb financial decisions on purpose

#95

Post by fegu » Sat, Sep 03, 2022, 5:36 PM UTC

This is similar to the choice between a salary (quite predictable) and a startup (maybe a lot, might just as well be zero). Or, in a company, between doing consulting or in-house product development.

Re: Why people make dumb financial decisions on purpose

#96

Post by rblatz » Sat, Sep 03, 2022, 5:38 PM UTC

mrwh wrote: post #67

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).

Would you stop working? Or would you take a break until you found something you truly wanted to work on?

Re: Why people make dumb financial decisions on purpose

#97

Post by ghaff » Sat, Sep 03, 2022, 5:39 PM UTC

anigbrowl wrote: post #92

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…

EV is such a nonsense measure anyway once you step outside the realm of pure theory. For example, the EV in this example (50% chance of $50m, or $0) is $25m. The EV of a 2.5% chance of $1 billion is also $25m, but your probability of getting nothing is 20 times higher. Is it more rational to choose this over the certainty of $1m? I don't think so. Is it rational to chose a 0.0025% chance of $1 trillion over $1m? At t…

Increase the payout with a correspondingly lower probability and you're basically lowering the expected utility--down to some point where it crosses the sure-fire payout.

Re: Why people make dumb financial decisions on purpose

#98

Post by seanmcdirmid » Sat, Sep 03, 2022, 5:44 PM UTC

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…

Unless you already have a million, then 50% chance at 50 million can make more personal sense than another million.

Re: Why people make dumb financial decisions on purpose

#99

Post by Bootvis » Sat, Sep 03, 2022, 5:46 PM UTC

anigbrowl wrote: post #94

Bootvis wrote: post #52

Earlier quoted context omitted.

No it’s not, if you play the game 20 times you’re almost certain to win 50 million and probably a lot more. Unless your utility function is flat after 20 million it does matter.

if you play the game 20 times you’re almost certain to win 50 million You can get any result you want if you just rewrite the problem conditions ◔_◔

I replied to someone claiming that you should always go for certainty no matter how many games you play. If you get to play the game 49 times it doesn’t make much sense to go for certainty 49 times because 2^-49 (or 2^-20) is really small.

Re: Why people make dumb financial decisions on purpose

#100

Post by jawns » Sat, Sep 03, 2022, 5:46 PM UTC

For those who say they would press the red button ...

* Imagine the payout on the red button were not $1M but $100K or $50K or $10K. Is there any point as it diminishes toward zero that would make you switch buttons?

* Imagine the payout on the green button were not $50M but $100M or $500M or $1B. Is there any point as it increases toward infinity that would make you switch buttons?

For those who say they would press the green button ...

* Imagine the payout on the red button were not $1M but $2M or $5M or $10M. Is there any point as it increases toward $50M that would make you switch buttons?

* Imagine the odds on the green button were not 1:2 but 1:3 or 1:5 or 1:10. At what point, as the odds diminish, would you switch buttons?