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

Re: Why people make dumb financial decisions on purpose

#111

Post by bluetomcat » Sat, Sep 03, 2022, 6:00 PM UTC

cromd wrote: post #90

BeetleB wrote: post #53

Earlier quoted context omitted.

> 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…

Well, life doesn’t always give many chances to play a game. You can only work at so many failed startups, or have so many failed long-term romantic relationships before you’ve used your best years! Someone else already made the point about the risk of walking away empty handed, but I’m just pointing out that some domains allow for many retries and some don’t.

This represents the trap of over-rationalisation which is so prevalent in the Western world. You cannot devise universal rational guidelines suitable for every situation and every subjective experience. There is a multitude of various different factors involved in every particular situation. The lean and precise rational model breaks badly simply because it doesn’t (and can’t) account for all the factors.

Re: Why people make dumb financial decisions on purpose

#112

Post by danielmarkbruce » Sat, Sep 03, 2022, 6:01 PM UTC

mgraczyk wrote: post #104

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…

The problem with the analysis in the article and with your analysis is that the expected utility of the player is not the same as the expected amount of money. Different people have different "utilities of money" reflecting their different risk tolerances, incomes, satiation rates (diminishing marginal utility), etc. The expected value analysis is the correct one if you use the right "value". If you are only playing…

Exactly.

Econ 101 covers expected utility, and it's one of the few pieces of useful econ theory. It's like people write these articles without an elementary understanding of the theory which might be able to sensibly explain the situation.

Re: Why people make dumb financial decisions on purpose

#113

Post by phao » Sat, Sep 03, 2022, 6:02 PM UTC

ghaff wrote: post #101

UKR_anon wrote: post #87

Earlier quoted context omitted.

Everytime you book additional insurances that cover small amounts of money. Like a airplane ticket insurance (that only covers the fee of the ticket if you cancel). Or a additional rental car insurance. Assuming that Insurance companies are not stupid and only offer an Insurance that is +ev for them, that means its -ev for you. If you are in the financial situation that 1-5k$ wont ruin you its rational to NOT take th…

Investing has a degree of this as well. And, in practice, most rational investors will diversify based on a number of factors into fairly safe but low return assets and into potentially higher return but riskier ones.

The investor's situation, I believe, is very much different from the common person's. The investor put him or herself in the position of doing tons and tons of financial transactions and investments, etc, like that. He or she put him or herself in a situation such that EV-reasoning makes sense. It seems to be that this isn't the situation for the common person.

But I agree... If you are an investor, or maybe a professional poker player, then you'd have put yourself in a position that favors reasoning guided by EV.

There are other ones as well, non-money related. For example, in sports. I believe basketball players probably try to do this. There are so many shots. They're probably using EV to guide their strategy and practice.

Re: Why people make dumb financial decisions on purpose

#114

Post by danielmarkbruce » Sat, Sep 03, 2022, 6:03 PM UTC

https://en.wikipedia.org/wiki/Expected_utility_hypothesis

Re: Why people make dumb financial decisions on purpose

#115

Post by ghaff » Sat, Sep 03, 2022, 6:04 PM UTC

Kalanos wrote: post #45

seriously flawed perspective. it's a 50% chance of nothing versus a 100% chance of a life-changing amount of money. if it was $1K:$25K or $100K:$2.5M then you'd take the risk.

Totally depends on an individual. You can't generalize that $1M is life-changing for everyone and $100K is not for anyone.

Re: Why people make dumb financial decisions on purpose

#116

Post by ghaff » Sat, Sep 03, 2022, 6:10 PM UTC

danielmarkbruce wrote: post #112

mgraczyk wrote: post #104

Earlier quoted context omitted.

The problem with the analysis in the article and with your analysis is that the expected utility of the player is not the same as the expected amount of money. Different people have different "utilities of money" reflecting their different risk tolerances, incomes, satiation rates (diminishing marginal utility), etc. The expected value analysis is the correct one if you use the right "value". If you are only playing…

Exactly. Econ 101 covers expected utility, and it's one of the few pieces of useful econ theory. It's like people write these articles without an elementary understanding of the theory which might be able to sensibly explain the situation.

And expected utility (and decreasing marginal utility of money) does a good job of explaining why most people would change behaviors as you scale the numbers involved even if you keep the ratio of expected values the same.

Re: Why people make dumb financial decisions on purpose

#117

Post by kwhitefoot » Sat, Sep 03, 2022, 6:12 PM UTC

BeetleB wrote: post #59

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.

It is the expected value if multiple people play the game. As I posted in another comment: There are 20 people in line ahead of you. Each one of them hits the green button, and you physically see that half of them made $25 million. Would you not be tempted to hit the green button?

No because each event is independent.

Re: Why people make dumb financial decisions on purpose

#118

Post by ghaff » Sat, Sep 03, 2022, 6:18 PM UTC

phao wrote: post #113

ghaff wrote: post #101

Earlier quoted context omitted.

Investing has a degree of this as well. And, in practice, most rational investors will diversify based on a number of factors into fairly safe but low return assets and into potentially higher return but riskier ones.

The investor's situation, I believe, is very much different from the common person's. The investor put him or herself in the position of doing tons and tons of financial transactions and investments, etc, like that. He or she put him or herself in a situation such that EV-reasoning makes sense. It seems to be that this isn't the situation for the common person. But I agree... If you are an investor, or maybe a profes…

re: sports

Five Thirty Eight writes about this from time to time. Three points shots in basketball. Going for it on fourth down. Going for a two point conversion. You can work out the stats for all this sort of thing--and there are apparently biases for various reasons why coaches/players don't always follow the EV strategy.

Re: Why people make dumb financial decisions on purpose

#119

Post by baobabKoodaa » Sat, Sep 03, 2022, 6:30 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."

No, it doesn't mention it, and in fact the quote you copypasted does not contain any mention of it. The author is oblivious to the concept and is erroneously concluding it to be merely a psychological effect.

Re: Why people make dumb financial decisions on purpose

#120

Post by plorg » Sat, Sep 03, 2022, 6:36 PM UTC

The discussion here seems to be whether, if we can capture all of the relevant details, a certain person is making a rationally optimal decision. Taking this to its logical conclusion we're fitting math to a process of decision making and adjudicating which criteria are considered rational and which are not. Sure there is mathematics involved here, but it reads a lot more like a question of who is our isn't allowed agency, in this case in their economic and financial decisions.