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I'm sure that my behavior does not reflect my answers on this test. Given the numbers, I calculate expected value and answer rationally. In real life, a) the va

I'm sure that my behavior does not reflect my answers on this test. Given the numbers, I calculate expected value and answer rationally. In real life, a) the values and percentages are much less clear and b) even if they weren't I know I don't follow them as rationally.

aristidb 16y ago
Behaving on expected value is not rational.
- dirtyaura 16y ago
  Exactly. Choosing between a) 100% chance of $10 vs 10% chance of $100 is very different question than choosing between b) 100% chance of $100K vs 10% chance of $1M. or c) 100% chance of $1M vs 10% chance of $10M. I think many people will choose 10%/$100 combo of a) just for the thrill. The latter two are of course dependent your financial situation, but hit an interesting sweet spot for YC crowd. What would be your choices?
  - joshu 16y ago
    As I said in another comment, i tested this exact question out on mechanical turk: http://joshua.schachter.org/2008/09/amateur-economist.html http://joshua.schachter.org/2008/09/amateur-economist.html
- llimllib 16y ago
  Behaving based on expected value is the only rational choice.
siglesias 16y ago
This is the point that I'm trying to get at. For Arrington to assert that entrepreneurs are "different" because they like risk, adventure, he is claiming that they knowingly choose bad deals. He is saying that these bad deals are compensated for not by money, reward, but the thrill of doing a startup. Hmm. We get a thrill from gambling sometimes even though we know that the odds are stacked against us. Arrington is drawing the same analogy for entrepreneurs, and that's a bad analogy. It's a romantic notion, but I don't think the monetary valuation of an entrpreneurial venture is negative in the minds of entrepreneurs.
- StavrosK 16y ago
  "Would you rather have a $100k steady job, or a 5% chance to make $1m in a year with a startup?" -> Definitely startup, even if the expected utility is half.
  - siglesias 16y ago
    Would you pay 50k to join a startup and work for free as a consultant?
    - StavrosK 16y ago
      What is this, an anchoring exercise? :P Are you asking if I would pay to work in a startup? No, I can start my own for free.
      - siglesias 16y ago
        Actually this question has large implications for pay-to-pitch, investment, incorporation fees, legal fees, and consulting services. No startup cost is zero. If there were a very large non-monetary utility gained from starting a startup from nothing, it would be interesting to see how the market has come around to charging for it.
    - deleted 16y ago
      [deleted]
    - siglesias 16y ago
      And just so everyone knows what I mean by this, 50k is the opportunity cost of the other job that's being forfeited. This means that the "thrill" of working in a startup must be worth at least 50k.
      - dazmax 16y ago
        But part of the thrill would be the possibility of the million.
- deleted 16y ago
mian2zi3 16y ago
Same here. The only "interesting" choice was when the safe/risky options had the same expected value. The percentages are much less clear, as are the payoffs. I was attracted less by the monetary payoff of the entrepreneurial life than the other, less tangible benefits: responsibility, control, independence, learning opportunities, challenge, etc. I'm not attracted to safety, I'm afraid of boredom.
groby_b 16y ago
Well, I think that's true for pretty much all surveys. If you are reasonably intelligent, it is actually hard to not figure out what is really asked and give answers based on how you would react instead of how you should react. I've never seen a survey that wasn't easily manipulatable. So I guess we have to rely on people to try to be honest...
JoshCole 16y ago
Completely agree, this felt more like a test of basic math skills than a test of behaviour. In real life it tends to be a lot harder to be able to calculate expected value, with some exceptions especially with card games.
JoeAltmaier 16y ago
There was no beta attached to the time-value of money - so it was no way to measure the risk.
Natsu 16y ago
I'm glad to see that I'm not the only one who calculated EVs.
rkosai 16y ago
Based on all these "rational actor" responses, I take it none of you purchase insurance?
- joshu 16y ago
  I certainly don't on things I can easily afford to replace.
- moron4hire 16y ago
  I have car insurance because it is legal mandated. I don't have health or life insurance.
- gojomo 16y ago
  Only when it's legally/contractually required (car/financed-house), or comes with negotiated discounts (health), or handles a catastrophic/risk-of-ruin situation (chronic disease/business liability). Insuring against small losses is a net financial loser, or else the insurance company wouldn't offer it.
- anamax 16y ago
  Actual rational actors understand that extreme loss has a disproportionate effect. (In other words, losing $100k is more than 1k as expensive as losing $100 for most of us.) Naive rationality may be easy to analyse but that just means that the GIGO transfer doesn't cost much.
powrtoch 16y ago
Then why didn't you answer according to what you think you would actually do? The idea of the test was to gain insight into your personality with regard to risk and reward. If you can't honestly see yourself accepting a (.4 * $1000) loss over a $50 loss, then you answered incorrectly according to what the question was actually asking. Personally I had the same dilemma, but I found it revelatory to really look inside myself and see if I could do what expected utilities would dictate. It was especially difficult on the loss questions, as I have very little capital to my name.
- cheald 16y ago
  I think the problem is that risk always has to be calculated against reward, and in this test, it was always reward-against-reward or risk-against-risk. For example, let's take one of the loss scenarios and pretend that it's some wacky hosting cost. * $50 guaranteed loss - paying $50 for 100GB of bandwidth * 0.04% of chance of $1,000 loss - paying $2.50 for 100GB of bandwidth, but an extra $997.50 for unlimited bandwidth if you go over 100GB. If I don't expect to do much traffic, I'll take the 4% chance; I project I might do 20GB of traffic during the term of the contract, so I will save 20x as much money. My product has a 4% chance of going viral. If I lose the contract lottery, it's because I've won the product lottery, and that 4% means I've got a rapidly-growing product that is going to make me a lot of money. The risk of that extra $1000 is well worth knowing that I'm not going to have to move my product between hosting providers when the blogosphere in in a mad frenzy about my internet tortilla delivery service. That's completely different than a scenario wherein the hosting provider says "This is a variable contract; you owe us $2.50 for 50 GB of bandwidth, but each month we pick one of our 25 customers and they pay $1,000." There's no way in hell I'd sign on for that. There is no indicator of success correlated to the risk there. Without context, I'm not sure that these questions are all that useful. You point this out yourself - the risk questions will be interpreted variably depending on the individual's resources and perspective. I can absorb a $50 loss trivially, so if the reward is equivalent, I'll choose that.
radu_floricica 16y ago
When comparing to the rational choice, I did what I do in real life: added a safety margin. If anybody tells me there is a 10% chance for a project to succeed, I will always subtract a couple of percentage points for unforeseen circumstances. You treated it like a school test, looking for the "right" answer. To paraphrase Nicholas Nassim Taleb, if a coin falls head 100 times straight, the chances it will fall tails the 101 time are 50% only in academia - in the real life the coin is fixed.
siglesias 16y ago
Results! http://news.ycombinator.com/item?id=1922412 http://news.ycombinator.com/item?id=1922412

aristidb 16y ago

Behaving on expected value is not rational.

dirtyaura 16y ago
Exactly. Choosing between a) 100% chance of $10 vs 10% chance of $100 is very different question than choosing between b) 100% chance of $100K vs 10% chance of $1M. or c) 100% chance of $1M vs 10% chance of $10M. I think many people will choose 10%/$100 combo of a) just for the thrill. The latter two are of course dependent your financial situation, but hit an interesting sweet spot for YC crowd. What would be your choices?
- joshu 16y ago
  As I said in another comment, i tested this exact question out on mechanical turk: http://joshua.schachter.org/2008/09/amateur-economist.html http://joshua.schachter.org/2008/09/amateur-economist.html
llimllib 16y ago
Behaving based on expected value is the only rational choice.

siglesias 16y ago

This is the point that I'm trying to get at. For Arrington to assert that entrepreneurs are "different" because they like risk, adventure, he is claiming that they knowingly choose bad deals. He is saying that these bad deals are compensated for not by money, reward, but the thrill of doing a startup. Hmm. We get a thrill from gambling sometimes even though we know that the odds are stacked against us. Arrington is drawing the same analogy for entrepreneurs, and that's a bad analogy. It's a romantic notion, but I don't think the monetary valuation of an entrpreneurial venture is negative in the minds of entrepreneurs.

StavrosK 16y ago
"Would you rather have a $100k steady job, or a 5% chance to make $1m in a year with a startup?" -> Definitely startup, even if the expected utility is half.
- siglesias 16y ago
  Would you pay 50k to join a startup and work for free as a consultant?
  - StavrosK 16y ago
    What is this, an anchoring exercise? :P Are you asking if I would pay to work in a startup? No, I can start my own for free.
    - siglesias 16y ago
      Actually this question has large implications for pay-to-pitch, investment, incorporation fees, legal fees, and consulting services. No startup cost is zero. If there were a very large non-monetary utility gained from starting a startup from nothing, it would be interesting to see how the market has come around to charging for it.
  - deleted 16y ago
    [deleted]
  - siglesias 16y ago
    And just so everyone knows what I mean by this, 50k is the opportunity cost of the other job that's being forfeited. This means that the "thrill" of working in a startup must be worth at least 50k.
    - dazmax 16y ago
      But part of the thrill would be the possibility of the million.
deleted 16y ago

mian2zi3 16y ago

Same here. The only "interesting" choice was when the safe/risky options had the same expected value. The percentages are much less clear, as are the payoffs. I was attracted less by the monetary payoff of the entrepreneurial life than the other, less tangible benefits: responsibility, control, independence, learning opportunities, challenge, etc. I'm not attracted to safety, I'm afraid of boredom.

groby_b 16y ago

Well, I think that's true for pretty much all surveys. If you are reasonably intelligent, it is actually hard to not figure out what is really asked and give answers based on how you would react instead of how you should react. I've never seen a survey that wasn't easily manipulatable. So I guess we have to rely on people to try to be honest...

JoshCole 16y ago

Completely agree, this felt more like a test of basic math skills than a test of behaviour. In real life it tends to be a lot harder to be able to calculate expected value, with some exceptions especially with card games.

JoeAltmaier 16y ago

There was no beta attached to the time-value of money - so it was no way to measure the risk.

Natsu 16y ago

I'm glad to see that I'm not the only one who calculated EVs.

rkosai 16y ago

Based on all these "rational actor" responses, I take it none of you purchase insurance?

joshu 16y ago
I certainly don't on things I can easily afford to replace.
moron4hire 16y ago
I have car insurance because it is legal mandated. I don't have health or life insurance.
gojomo 16y ago
Only when it's legally/contractually required (car/financed-house), or comes with negotiated discounts (health), or handles a catastrophic/risk-of-ruin situation (chronic disease/business liability). Insuring against small losses is a net financial loser, or else the insurance company wouldn't offer it.
anamax 16y ago
Actual rational actors understand that extreme loss has a disproportionate effect. (In other words, losing $100k is more than 1k as expensive as losing $100 for most of us.) Naive rationality may be easy to analyse but that just means that the GIGO transfer doesn't cost much.

powrtoch 16y ago

Then why didn't you answer according to what you think you would actually do? The idea of the test was to gain insight into your personality with regard to risk and reward. If you can't honestly see yourself accepting a (.4 * $1000) loss over a $50 loss, then you answered incorrectly according to what the question was actually asking. Personally I had the same dilemma, but I found it revelatory to really look inside myself and see if I could do what expected utilities would dictate. It was especially difficult on the loss questions, as I have very little capital to my name.

cheald 16y ago
I think the problem is that risk always has to be calculated against reward, and in this test, it was always reward-against-reward or risk-against-risk. For example, let's take one of the loss scenarios and pretend that it's some wacky hosting cost. * $50 guaranteed loss - paying $50 for 100GB of bandwidth * 0.04% of chance of $1,000 loss - paying $2.50 for 100GB of bandwidth, but an extra $997.50 for unlimited bandwidth if you go over 100GB. If I don't expect to do much traffic, I'll take the 4% chance; I project I might do 20GB of traffic during the term of the contract, so I will save 20x as much money. My product has a 4% chance of going viral. If I lose the contract lottery, it's because I've won the product lottery, and that 4% means I've got a rapidly-growing product that is going to make me a lot of money. The risk of that extra $1000 is well worth knowing that I'm not going to have to move my product between hosting providers when the blogosphere in in a mad frenzy about my internet tortilla delivery service. That's completely different than a scenario wherein the hosting provider says "This is a variable contract; you owe us $2.50 for 50 GB of bandwidth, but each month we pick one of our 25 customers and they pay $1,000." There's no way in hell I'd sign on for that. There is no indicator of success correlated to the risk there. Without context, I'm not sure that these questions are all that useful. You point this out yourself - the risk questions will be interpreted variably depending on the individual's resources and perspective. I can absorb a $50 loss trivially, so if the reward is equivalent, I'll choose that.

radu_floricica 16y ago

When comparing to the rational choice, I did what I do in real life: added a safety margin. If anybody tells me there is a 10% chance for a project to succeed, I will always subtract a couple of percentage points for unforeseen circumstances. You treated it like a school test, looking for the "right" answer. To paraphrase Nicholas Nassim Taleb, if a coin falls head 100 times straight, the chances it will fall tails the 101 time are 50% only in academia - in the real life the coin is fixed.

siglesias 16y ago

Results! http://news.ycombinator.com/item?id=1922412 http://news.ycombinator.com/item?id=1922412