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Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

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Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#31
post #28

I think you're interpreting people's irrationality in the wrong way. People are often irrationally risk averse : most people would much rather pay $X with probability 1 than $2X with probability 1/2 and $0 elsewhere. The reason lottery tickets sell is because utility functions are nonlinear. After buying a $1 lotto ticket, they're still poor; they don't miss the dollar. But if they win, suddenly they are rich , which…

Utility functions are nonlinear with decreasing slope . When you don't have enough money to buy everything you want, you buy the most important things first. A 50% chance of gaining 2 x dollars is a worse deal than a 100% chance of gaining x dollars, with the difference in utility becoming more significant percentage-wise for larger x . This rant used to conclude with "therefore, buying lottery tickets is irrational;…

I think it's a lot more complicated than the diminishing-marginal-returns model taught in econ courses. For example, there's a pretty sharp discontinuity at "can move to a better neighborhood". There's another one at "can afford a vacation home", and another one at "can send kids to college". And then there's a big one at "never has to work again." When an event bumps you from one category into the next one up, it can often be rational to take a small chance at that rather unlikely event than to worry about a few dollars that don't make a material difference in your lifestyle anyway.

Actually, this is a big problem with conventional economics: it assumes that all variables are conventional. So income taxes don't affect people's willingness to work nearly as much as theory predicts, because their choice is usually between "Have a job" and "Don't have a job" and not "Do $30K of work per year" and "Do $40k of work per year". Unemployment exists because a business can't just drop wages to the equilibrium level, but rather workers make the choice between "I'm being paid fairly" and "I'm not being paid fairly" and act appropriately. Market niches are not instantly filled because entrepreneurship often has a binary outcome of "Get rich" and "Fail", and not a continuous distribution of outcomes.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#32

Earlier quoted context omitted.

I'm sorry if this response is off-topic, but your last question piqued my curiosity so I would like to answer it. There is an authoritative source of random numbers. In 1955, The RAND Corporation (a Cold War-era think tank) published a wonderful book entitled "A Million Random Digits with 100,000 Normal Deviates". Amazon.com has a copy of it, including some amusing reviews: http://www.amazon.com/Million-Random-Digits…

Thanks for the informative reply, gmazzola. Could someone who doesn't trust random.org verify that the numbers are indeed random and impossible to rig? What I have in mind is a number that (1) nobody has influence over, (2) can be measured objectively, (3) is observable to everybody, and (4) is impossible to predict. For example, I could tell my friend that I'll do his laundry for a month if Barack Obama's speech tom…

Sadly, this is outside my area of expertise. I will nonetheless attempt to answer your question, but please take my words with a grain of salt.

Before we even begin delving into true RNGs, it is worthwhile to consider if we're over-engineering the problem. Is a PRNG "good enough" for the task at hand? In most cases, it is. A well-seeded PRNG, such as the ones present in modern-day Operating Systems, are suitable for most tasks not involving National Security.

However, if you have a genuine need for a true RNG, a computer algorithm certainly won't be generating it. Computers are by nature deterministic, and thus are very poor at behaving unpredictably. Thus, like with all good problems, we are forced to enter the realm of physics.

The fundamental problem is, who will be observing the source of randomness? To my knowledge, there isn't a physical source of randomness that is observable to everybody. (I did some quick googling to confirm my suspicions, but if you're planning on using my words to do anything useful, please confirm my statement!). Thus, as I see it, you have several options:

1) Your idea, where all parties derive a true random number from physics and publically sum everyone's numbers together. Your qualifiers (2) through (4) hold, but (1) is difficult. In this case, a certain number of rogue nodes will be able to manipulate the computation. I remember a Professor of mine, who does research in this field, stating the minimum number of truthful nodes needed in a distributed computation is (2/3)n + 1, but again confirm this number for yourself.

My point here is, using the public-summing method, you are faced with the difficult problem of determining if a node is attempting to manipulate the system. While a provable solution has been found, after decades of research across the globe, my Professor still is working on the problem, thus demonstrating it is not an easy task.

2) Have a single computer (say, random.org) that is observing a true RNG, and publicizes the result for all to see. Of course you'd use asymmetric crypto so that all parties can prove that they've received the correct number.

Again, your qualifiers (2) through (4) pass, but (1) presents a different problem. We're back to where we started: do you trust random.org?

However, it's an easier task to make an authority trustable than a peer in a distributed computation. We trust Verisign to be a certificate authority, because we believe their security practices are half-decent, and they can be audited. (Every year all CA's are independently audited by WebTrust.org using pretty strict criteria.)

The same could be done for random.org: why not require certification and frequent auditing of their RNG equipment?

The other nice thing about RNGs is that you can audit them yourself, given enough time and expertise. When viewed correctly, poor RNGs will have distinct patterns visible to the eye (example: http://www.cs.hku.hk/cisc/projects/va/index.htm ).

The crux of my argument is: I don't know of a true RNG, that upon observation by multiple parties, all will receive the same random number. My instinct and my research says that none exist, but I would love to be proven wrong. Crypto experts, correct me!

If you'd like more information, Wikipedia is always invaluable: http://en.wikipedia.org/wiki/Hardware_random_number_generato...

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#33

Earlier quoted context omitted.

Thanks for the informative reply, gmazzola. Could someone who doesn't trust random.org verify that the numbers are indeed random and impossible to rig? What I have in mind is a number that (1) nobody has influence over, (2) can be measured objectively, (3) is observable to everybody, and (4) is impossible to predict. For example, I could tell my friend that I'll do his laundry for a month if Barack Obama's speech tom…

Sadly, this is outside my area of expertise. I will nonetheless attempt to answer your question, but please take my words with a grain of salt. Before we even begin delving into true RNGs, it is worthwhile to consider if we're over-engineering the problem. Is a PRNG "good enough" for the task at hand? In most cases, it is. A well-seeded PRNG, such as the ones present in modern-day Operating Systems, are suitable for…

That is really a fantastic answer, Greg! Thanks for the valuable information.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#34

Earlier quoted context omitted.

On a practical note, what stops them getting a refund and repurchasing until they get it for free. Your other observation is good, too, but I think this sentence gets to the heart of the problem. The double-or-nothing transaction is irreversible , which is what makes it a bad one. People like commercial transactions that can be reversed. Ideally, both parties should walk away feeling like they got a fine deal, but th…

maybe you can make it reversible by refunding it on the same terms, i.e the buyer has the right to return the good to the seller, and the seller pays 2X or 0 with prob 1/2 to the buyer.

Maybe, but a) there may be statutory rights issue, b) this just seems likely to annoy people and c) you might run the risk of actually having to comply with gambling laws if you take money from people and offer them a chance of doubling it.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#35
From experience in running various marketing campaigns, the magic 'number' is 1 in 10. Charging $X with the option of paying $1.1X (or just over, even) for a 0.1 probability of getting the money straight back will get the most people buying into the scheme. That'll be around 1 in 10 people too. Force the extra payment and around half of them will walk away there and then(1). Bump the price up to $1.1X without mentioning it, only that there's a 1 in 10 chance of getting it free and you'll see the overall take-up go up anywhere from 25% to 100%.

Long story short: Make your new price $1.1X without fanfare, offer a 1 in 10 chance of getting it for free and you all win. They get their chance at a freebie at a cost they don't notice, you get your promotion vibe bumping up sales.

(1)I know that that's obvious, and it was dumb to run it - but we ran it anyway for the sake of completeness.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#36

Earlier quoted context omitted.

Just a note: we don't sign our posts/comments here. Your username does that for you. http://news.ycombinator.com/item?id=198817

This may just be me having a bad day, but I do sense a little arrogance in your response. It does not hurt anyone if you add your name at the end of a comment.

It hurts everyone. It uses up screen space and reading time and has absolutely zero value.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#37
post #28

Earlier quoted context omitted.

Utility functions are nonlinear with decreasing slope . When you don't have enough money to buy everything you want, you buy the most important things first. A 50% chance of gaining 2 x dollars is a worse deal than a 100% chance of gaining x dollars, with the difference in utility becoming more significant percentage-wise for larger x . This rant used to conclude with "therefore, buying lottery tickets is irrational;…

I think it's a lot more complicated than the diminishing-marginal-returns model taught in econ courses. For example, there's a pretty sharp discontinuity at "can move to a better neighborhood". There's another one at "can afford a vacation home", and another one at "can send kids to college". And then there's a big one at "never has to work again." When an event bumps you from one category into the next one up, it ca…

"all variables are conventional"

s/conventional/continuous/. I can't type at night.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#38

As omegazero pointed out, there might be a selection bias if you don't do it right -- people will back out if they see they are in the unlucky group of folks who will get charged $2X. If you make people commit before revealing the amount, the issue is trust: how do customers know that the odds are actually 1/2 that they'll pay $0? How do they know you aren't just charging everyone $2X? You'd have to use some verifiab…

[deleted]

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#39

As omegazero pointed out, there might be a selection bias if you don't do it right -- people will back out if they see they are in the unlucky group of folks who will get charged $2X. If you make people commit before revealing the amount, the issue is trust: how do customers know that the odds are actually 1/2 that they'll pay $0? How do they know you aren't just charging everyone $2X? You'd have to use some verifiab…

> (Speaking of which: are there any commonly used publicly verifiable random numbers, like a die roll, but outside of any party's control? I presume there must be a need for them in a number of situations.)

Just use next week's state lottery's numbers and similar things. That is fairly impartial and hard to influence. Though that might be too few bits and too much latency for your liking.

Re: Instead of charging $X, why not charge $2X with prob 1/2 and $0 with prob 1/2?

#40

As omegazero pointed out, there might be a selection bias if you don't do it right -- people will back out if they see they are in the unlucky group of folks who will get charged $2X. If you make people commit before revealing the amount, the issue is trust: how do customers know that the odds are actually 1/2 that they'll pay $0? How do they know you aren't just charging everyone $2X? You'd have to use some verifiab…

heard of the game "evens or odds"? Each party can choose their own trusted random number generator to decide to play "even" or "odd"
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