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

Re: Why people make dumb financial decisions on purpose

#141

Post by abnry » Sat, Sep 03, 2022, 9:12 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…

You can derive what sort of variance a person will tolerate if they have a "utility function" quantifying the marginal value of each dollar. If you are risk averse (which people usually when they have a small net worth) then your utility curve will be concave. Think like sqrt(x) function.

OTOH, insurance companies can afford to have a roughly linearly utility function (because, as pointed out, they play the game much more often than others), which is why they are in business.

Re: Why people make dumb financial decisions on purpose

#142

Post by CrazyStat » Sat, Sep 03, 2022, 9:15 PM UTC

UncleMeat wrote: post #74

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).

Not so. It can be throughly reasonable to make a choice that has lower expected value but has a distribution that fits your needs more closely.

If one option doesn't fit your needs then it has lower utility.

Re: Why people make dumb financial decisions on purpose

#143

Post by [deleted] » Sat, Sep 03, 2022, 9:21 PM UTC

kwhitefoot wrote: post #117

BeetleB wrote: post #59

Earlier quoted context omitted.

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.

[deleted]

Re: Why people make dumb financial decisions on purpose

#144

Post by CrazyStat » Sat, Sep 03, 2022, 9:22 PM UTC

roenxi wrote: post #54

_Algernon_ wrote: post #11

There's diminishing returns on the utility of money. If you're living paycheck to paycheck that guaranteed million is gonna give you a higher expected return of utility than the next 49 million combined. I disagree with the title calling it a "dumb" financial decision. It can be perfectly rational to take the million.

A useful formula is the Kelly Criterion [0]. I'm abusing the logic and probably going to apply this wrong, but... I think this counts as a 24:1 bet (we notionally have $1 million, we can gamble to get another $24). The Kelly bet is 0.5 - 0.5/24 ~= 0.5. So we would want to put about half our wealth into this gamble and that implies it starts becoming attractive around the time we have $2 million to invest. Up till the…

This is an interesting way of looking at it that I hadn't thought of--turning the Kelly criterion around to ask "what would my bankroll have to be to make this bet worth it" rather than "what size bet should I make given the bankroll I have."

It's worth noting that it can often make sense to be more conservative than the Kelly criterion would suggest, depending on your risk tolerance. So I would consider your calculation a lower bound.

Re: Why people make dumb financial decisions on purpose

#145

Post by BeetleB » Sat, Sep 03, 2022, 9:24 PM UTC

kwhitefoot wrote: post #117

BeetleB wrote: post #59

Earlier quoted context omitted.

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.

Fair enough.

What if you had a 80% chance instead of a 50% chance?

90% chance?

I'm sure at some probability before 100% you'd be willing to take that chance.

Re: Why people make dumb financial decisions on purpose

#146

Post by subsuboptimal » Sat, Sep 03, 2022, 10:14 PM UTC

WalterBright wrote: post #51

subsuboptimal wrote: post #24

I constantly run into situations where I spend money in ways that are financially non optimal, but socially good (in my mind). An easy to understand example is, I believe I should pay more in taxes and everyone as wealthy as I am should too. I rent an apartment, but I rent it out at the cost it takes to maintain it in good condition, because I think profiting off rent is unethical. This means I'm generally renting mu…

If you want to may more in taxes, the IRS accepts donations. There can also be good business reasons to charge below market rent. Having a lower vacancy rate, for one.

No, I don't think you understand. I'm not charging below market rate, I'm charging at cost. Whatever it takes to maintain the building and provide utilities, etc. The space is worth, perhaps, $2400 a month. My last tenant paid $600 a month. She needed a place to stay for a year while she built up a down payment. Being able to stay with us meant she could save tens of thousands and she was able to embark on her own.

Could I have charged $1000 and pocketed a little profit? Of course. But it would have come directly at her ability to succeed. I think that's deeply unethical. I think it's morally repugnant to profit from housing.

Re: Why people make dumb financial decisions on purpose

#147

Post by subsuboptimal » Sat, Sep 03, 2022, 10:20 PM UTC

WalterBright wrote: post #51

subsuboptimal wrote: post #24

I constantly run into situations where I spend money in ways that are financially non optimal, but socially good (in my mind). An easy to understand example is, I believe I should pay more in taxes and everyone as wealthy as I am should too. I rent an apartment, but I rent it out at the cost it takes to maintain it in good condition, because I think profiting off rent is unethical. This means I'm generally renting mu…

If you want to may more in taxes, the IRS accepts donations. There can also be good business reasons to charge below market rent. Having a lower vacancy rate, for one.

The IRS does not, in fact, accept donations.

But the point is that I believe we should all chip in more to help each other out. If you make, eg, $750k a year like I do an increase in taxes isn't really going to hurt your ability to live comfortably. I'm confident I could travel anywhere in the world, buy a second home, etc. I could still do those things if I payed more in taxes. Just... Not as often.

Re: Why people make dumb financial decisions on purpose

#148

Post by szhu » Sat, Sep 03, 2022, 11:54 PM UTC

rotexo wrote: post #23

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”

This is how VC works, right?

Re: Why people make dumb financial decisions on purpose

#149

Post by danielmarkbruce » Sun, Sep 04, 2022, 12:25 AM 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.

The people who write articles like this, call it "why people make dumb decisions", and don't appear to understand this is a well understood area.

It's written as though they stumbled across this esoteric idea written by some dude 100 years ago. There is a whole set of papers, Bernoulli is one of the guys who did research on it and there are a bunch more. There is a whole field, the ideas have been pulled together. It's introduced in any half decent microeconomics class.

What's next? An article suggesting maybe we can predict how long it will take an apple to hit the ground? That some guy named Newtown penned a few useful ideas on it back in the day? And pretending "physics" isn't a field?

Re: Why people make dumb financial decisions on purpose

#150

Post by gweinberg » Sun, Sep 04, 2022, 1:13 AM UTC

orlp wrote: post #71

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 games you'll still be better off pressing the 1 million button 5-10 times, at the start if you don't know in advance how many presses you get, or at the end if you do and haven't won big yet.

You've only got a one in a million chance of losing 20 times in a row. If you lose 19 times in a row, sure you can take the sure million on the last try. But it doesn't make any sense to take the sure million at the beginning.