Honestly I'd hit the red button. I'd rather take a guaranteed payoff of my mortgage and all other debt, with plenty left over for a few neat toys, than chance walking away with nothing.
Why people make dumb financial decisions on purpose
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Re: Why people make dumb financial decisions on purpose
#22There'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.
There's also "purely statistical" problems with the argument the 50 million at 0.50 probability is the better decision: it makes an erroneous ergodicity assumption. In other words, it assumes that the expectation of a one-shot decision over people is the same as it is for the decision within-person. Sure, if you were making the choice over and over and over again, it would be better to repeatedly hit the green button. But that's not the situation. The situation is a mixture of outcomes, so for any given individual the expected outcome might be zero.
There's also I think an implicit stationarity assumption built in, that if you say you'll pay me X amount over time, that you'll actually do that, that inflation wont eat it into oblivion, etc. It's a classic case of theoretical models not working in reality.
This is kind of the point of the essay, but I think it could have been made more rigorously (as people here are pointing out).
Re: Why people make dumb financial decisions on purpose
#23The 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”
Re: Why people make dumb financial decisions on purpose
#24I 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 much much cheaper than local rents, and my tenants can therefore build savings.
Re: Why people make dumb financial decisions on purpose
#25Other commenters have mentioned marginal utility, but this article is basically explaining minimax [0] decision making - people (and chess AIs) tend to pick the option that minimizes worst case losses.
Re: Why people make dumb financial decisions on purpose
#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.
Re: Why people make dumb financial decisions on purpose
#27It think they misstated the actual problem which should have an equal EXPECTED value: Expected Value = Value x Probability.
Re: Why people make dumb financial decisions on purpose
#28It's a catchy headline, but the "decisions" used as examples, aren't really "dumb" under the complete set of facts. Really, what this is about is that the typical mathematics used to discuss a certain type of financial decision (mostly things like investments) uses an incomplete model that doesn't consider appropriately the actual values involved -- for example, failing to consider the wildly nonlinear curve of the m…
I think you just repeated the article's main argument.
Why would anyone bother reading the article when the title and pretty much the first line are falsehoods.
Re: Why people make dumb financial decisions on purpose
#29"A 50% chance of winning $50 million would equate to an expected value of $25 million." If you hit the green button you either get $50 million or 0$. Hitting the red button gives $1 million. Unless you don't want $1 million or don't need it, you're going to hit the red button and not the green button.
If you have $100 million to your name, it'd be smarter to hit the green button. It really depends on what you're starting with.
I'd go for the green button if I had $5 million to my name. Another $1 million isn't going to make a huge difference in my life, $50 million would.
Somewhere around $3 million is probably where I'd switch buttons.
Re: Why people make dumb financial decisions on purpose
#30There'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.
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."