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

Re: Why people make dumb financial decisions on purpose

#151

Post by remram » Sun, Sep 04, 2022, 2:04 AM UTC

Tade0 wrote: post #56

> The mathematical answer is you hit green every time. Nope. There's a whole field of research about this - decision theory - which doesn't agree with this decision. Most people appear to go with the Minmax approach - they minimize potential losses(or in this example: maximize minimal payouts). For one-time events it's a sound strategy.

Yeah this is really weird. The author knows one "mathematical" measure, 'expected value', and calls that "mathematics". Ignoring the fact that mathematics have given us way more measures such as variance and the other moments that are just as important and "mathematical". Then microeconomics have given us 'utility' etc.

Finding one mathematical concept and saying "mathematics say this" is so strange.

Re: Why people make dumb financial decisions on purpose

#152

Post by UncleMeat » Sun, Sep 04, 2022, 2:16 AM UTC

CrazyStat wrote: post #142

UncleMeat wrote: post #74

Earlier quoted context omitted.

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.

Then this is worthless as a decision making system since your decisions will always already be the one that maximizes expected utility via this unknowable transformation.

Re: Why people make dumb financial decisions on purpose

#153

Post by CrazyStat » Sun, Sep 04, 2022, 3:09 AM UTC

UncleMeat wrote: post #152

CrazyStat wrote: post #142

Earlier quoted context omitted.

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

Then this is worthless as a decision making system since your decisions will always already be the one that maximizes expected utility via this unknowable transformation.

No, that doesn't follow. You might be acting in a short-sighted or impulsive way that doesn't maximize your utility. You can't just post-hoc declare that your true utility function is whatever would have led you to the decision you made.

Re: Why people make dumb financial decisions on purpose

#154

Post by robocat » Sun, Sep 04, 2022, 4:20 AM UTC

scarmig wrote: post #62

Isn't the best solution here to find a wealthy investor and sell him the option to press the green button priced at $20M? You get $20M, and they get an instrument with an EV of $25M at the cost of $20M.

You would need an auction to get a good payout. If you only find one smart wealthy investor, they can offer you a take-it-or-leave-it $2 million.

Your choice then becomes take $1 million from the red button, or sell the green button for $2 million.

I imagine most people would take the 2 million, especially because I suspect most people are poor at negotiating when life-changing amounts of money are involved. I have seen many naive people do silly house trades (or missing out on good trades).

Re: Why people make dumb financial decisions on purpose

#155

Post by pcthrowaway » Sun, Sep 04, 2022, 4:47 AM UTC

bcrosby95 wrote: post #69

Given my current financial situation, 1 million would let me retire immediately. What I see when I look at those buttons are: 100% chance of being able to retire early vs 50% chance of being able to retire early.

Unless you're expecting to less than maybe 10 years to live, I wonder how anyone can assume $1 million would be enough to retire, given the uncertainty about the rate of inflation in the next few years.

Re: Why people make dumb financial decisions on purpose

#156

Post by djmips » Sun, Sep 04, 2022, 6:10 AM UTC

mrwh wrote: post #106

rblatz wrote: post #96

Earlier quoted context omitted.

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

My job is what I want to work on. But I'm lazy, and I know myself well enough to know that if I didn't have to go through the things I dislike about my job (hello doing performance reviews), I'd stop doing it all. And it would ultimately be to my detriment. I wish it were otherwise, but there we go.

I'm probably much older then you. My advice is stop thinking you are lazy. If $50 million is enough for you to be comfortable for the rest of your life then take that - nothing is more valuable than time. You'll find something rewarding to do with your time. Even if you just enjoy your life, it's fine!

Re: Why people make dumb financial decisions on purpose

#157

Post by lostmsu » Sun, Sep 04, 2022, 6:26 AM UTC

cm2012 wrote: post #42

lostmsu wrote: post #41

Earlier quoted context omitted.

It is a dumb financial decision. You could find a third party you could agree with to give you 20mil now for whatever the coin toss brings you.

That's not the point of this hypothetical question though. It's like saying you decide to break the train tracks in the trolley problem.

The trolley problem implies urgency of action. This one does not seem to.

In practice most financial decisions take long time to make.

Re: Why people make dumb financial decisions on purpose

#158

Post by pb7 » Sun, Sep 04, 2022, 9:04 AM 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.

There were plenty of social networks before Facebook with MySpace being the biggest.

Re: Why people make dumb financial decisions on purpose

#159

Post by nly » Sun, Sep 04, 2022, 11:04 AM UTC

petercooper wrote: post #102

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.

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!

But we live in a world of real time traffic reports and satnav, so ...just do what's best ok the day

Re: Why people make dumb financial decisions on purpose

#160

Post by daniel-cussen » Sun, Sep 04, 2022, 1:42 PM UTC

_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.

Yeah like why are the numbers so enormous? Game shows typically require signing up, a lot of waiting, backgrounders, castings even, they don't treat you great, and they tease money but never pay it. Like one time per game show, not per season, per show.

And it fucks people's reasoning about money up, you can't go into a raise negotiation with those game show numbers getting your personal finances and your leverage and expectations out of whack. Same as fashion magazines, just seeing a pretty shirt and seeing it costs $45000 for instance instantly fucks your notion of the value of a dollar.