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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?

#21

Post by russell »

gmazzola wrote: post #16
lunchbox wrote: post #10

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…

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…

You are right. The reviews are worth the trip over to Amazon. I suspect some Amazon programmers are having a little fun with randomness.

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

#22

Post by cubicle67 »

dxjones wrote: post #12

I like the lottery ticket analogy some people have made, but here is my twist. My service costs $X per month. So if you like it, you'll want to pay $X. ... But for a just this month, there is a 1/10 chance your $X will get you the service for the entire year!! ... and if you don't "win", you still get what you paid for. I think this might encourage people who are on the edge to sign up now, and still feel good no mat…

For it to be a lottery ticket analogy, you'd pay half the cost for a 50% change of actually getting the goods

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

#24

Post by lunchbox »

gmazzola wrote: post #16
lunchbox wrote: post #10

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…

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 tomorrow contains an even number of words, and he'll do my laundry otherwise. This would appear to be truly random, but what if I secretly am friends with Barack Obama and can rig it in advance?

Is there some easy, practical way of producing a number whose randomness a large number of mutually distrustful parties can agree on? (I am thinking of something like asking each party to produce a number, and then publicly summing everyone's numbers together.)

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

#26

Post by harshavr »

mechanical_fish wrote: post #11
nopassrecover wrote: post #5

A clever idea but I worry what happens to the people that miss out. They are either aware they've paid $2X (if you tell them) or they are aware that they've been "ripped off" (you are prepared to give it away for $0 so you must have at least 50% markup. Kind of like jewellery stores putting half price sales on $10-20k diamond rings). Either way you are associating negative feelings immediately and a sense of buyer's…

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.

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

#27

Post by anigbrowl »

azbob wrote: post #19
nostrademons wrote: post #9

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…

Actually, people play the lottery because they can't do math.

I'm not so sure about that. In California (and in several other places I've lived) the odds of winning are written out on the back of the ticket. Sure, a lot of people believe in not-systems like studying past numbers or drawing numbers from their dreams or casting spells; but deep down I think most people understand 'odds of winning = 1 in 57 million'.

Lottery addicts certainly can't do math since they waste a lot of money on tickets. But a good many other people just buy one a week or just occasionally, eg when there's a particularly large jackpot on offer. This isn't so irrational; a regular player will make a few bucks back over the year on small prizes, and the risk/reward ratio improves for a big jackpot even though the odds don't.

It's worth recalling that while the odds on any individual ticket are awful, enough people are playing that people do win big prizes on a semi-regular basis. For small-spend players who can afford it, and may think of it as semi-charitable given the uses to which lottery profits are put, is it really any more irrational than certain kinds of insurance?

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

#28

Post by dfranke »

nostrademons wrote: post #9

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 2x 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; period", but someone on Less Wrong recently brought up a valid exception: it can be rational if you're currently deeply in debt. Utility functions are actually sigma-shaped: they flatten as you get more deeply negative as well. Being two trillion in debt isn't very much worse than being one trillion in debt. So when you're in debt, your utility function can get steeper before it gets shallower.

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

#29

Post by rokhayakebe »

sachinag wrote: post #15
dxjones wrote: post #12

I like the lottery ticket analogy some people have made, but here is my twist. My service costs $X per month. So if you like it, you'll want to pay $X. ... But for a just this month, there is a 1/10 chance your $X will get you the service for the entire year!! ... and if you don't "win", you still get what you paid for. I think this might encourage people who are on the edge to sign up now, and still feel good no mat…

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.

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

#30

Post by jamesbritt »

azbob wrote: post #19
nostrademons wrote: post #9

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…

Actually, people play the lottery because they can't do math.

Same goes for renting movies. And it's worse, because there's about zero chance of winning money renting a movie. :)

Some people get a kick out of the whole buy a ticket, wait for the numbers, get excited dreaming thing.

For some folks, it's entertainment.

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