Why people make dumb financial decisions on purpose

Post by rufus_foreman » Sat, Sep 03, 2022, 7:33 PM UTC

rwmj wrote: post #126

rotexo wrote: post #79

Earlier quoted context omitted.

On a tangent, and I’m just spitballing here, how is this for a business idea. I: have a PhD (which is not to say I’m smart, it is just to say I have been exposed to lots of facts that other people may not have been exposed to), and I have a bunch of ideas that may or may not be good ones, but I’m too risk-averse to act on any of them and start a business. You: have a bunch of money and are open to ideas. So you pay m…

The thing you learn from start-ups is that ideas are worth nothing. It's execution that matters. But ... if you were an oracle (religious, not database) who sometimes foretold the future, would there be a marketplace for your ideas? In 2003 if you described a social network would that be valuable information? I tend to think no since there were social networks before Facebook but FB were lucky and executed very well.

Post by fxtentacle » Sat, Sep 03, 2022, 7:45 PM UTC

whatshisface wrote: post #88

UncleMeat wrote: post #72

Earlier quoted context omitted.

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.

This can be captures pretty well by taking the logarithm of each outcome's dollar figure before computing the expected value, if you ever find yourself wanting to calculate how to balance a portfolio.

Post by incone123 » Sat, Sep 03, 2022, 8:27 PM UTC

chmod600 wrote: post #124

petercooper wrote: post #102

Earlier quoted context omitted.

Rory Sutherland (behavioural science chap) made a similar point on travel. He says that when he must get to the airport on time, he takes the back roads that get him there in a guaranteed 30 minutes rather than take the freeway that will take 15 minutes 95% of the time but could be heavily congested (and inescapable) otherwise. Sometimes urgency and efficiency are at odds!

Depends a lot on what the back roads are like, though. The freeway can be more reliable a lot of the time.

Post by xboxnolifes » Sat, Sep 03, 2022, 9:02 PM UTC

rblatz wrote: post #96

mrwh wrote: post #67

Earlier quoted context omitted.

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?

Post by withinboredom » Sat, Sep 03, 2022, 9:09 PM UTC

Kranar wrote: post #137

danielmarkbruce wrote: post #112

Earlier quoted context omitted.

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.

But the article does go over the utility and explicitly states that for many people the utility of a guaranteed 1 million dollars is greater than a 50/50 chance at 50 million, so I'm not sure what "people" you're talking about or if you even bothered to read the article.