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The interesting thing is not that people are risk averse (and thus choose 100% chance of $900), the interesting thing is that people become risk seeking when it

The interesting thing is not that people are risk averse (and thus choose 100% chance of $900), the interesting thing is that people become risk seeking when it comes to losses (and thus choose 90% chance of -$1000). You're creating a bit of a straw man when it comes to behavioral economists and their view of "rational actors" - the whole field is built around the understanding that there is more to economic decisions than expected value.

X-Istence 15y ago
Yes, however there is a slight chance of winning the odds and not paying anything. The risk is minimal. If the numbers were further apart I don't think the same logic would kick in. A = $900 lost B = $9000 lost with a 90% chance Those are odds I wouldn't want to try. I would take the instant loss knowing that my odds are just not good enough to win if I were to choose B.
- anothermachine 15y ago
  you mean 10% chance, right?
- neonkiwi 15y ago
  The reason that $1000 at 90% odds and $900 at 100% odds are used in this example is the expected value is the same in both cases, making the situations 'equivalent'. A 90% chance of losing $9000 has an expected value of -$8100.
  - erichocean 15y ago
    The way I read it is this: Do you want to be guaranteed you'll lose $900? Or do you want a 10% chance you'll lose nothing at all, with a 90% chance you'll lose another $100? So given a choice between being (nearly) totally wiped out, or having the chance of not being wiped out, people take the chance of keeping their cash. Makes sense to me.
    - mseebach 15y ago
      It seems odd to me that this disproves Bernoulli theory "that a person’s willingness to gamble a certain amount of money was a product of how that amount related to his overall wealth". If I could pull $900-$1000 from my savings with no immediate consequences, I'd be more likely to spend the $900 at 100%. But if loosing $900-$1000 means I'll have to tell my landlord I'll be late with the rent and then finding someone to borrow it from, and paying it back with interest, the extra $100 aren't significantly more crippling - it's the transaction cost of going through all this bother that's problematic - I'll take a 10% chance. Come to think of it, I actually did something like this: Prior to moving abroad a while ago, I consulted a lawyer to make sure I did everything right to avoid double taxation. That was a taking on a 100% chance of a rather big expense to avoid an unknown chance of an even larger expense.
    - ansible 15y ago
      Yes, I agree. I think 5b is very poorly framed, and doesn't show what it is puported to show in the linked article. I also agree that the reasoning changes a lot if this is a one-time event vs. a regular occurance.
anothermachine 15y ago
That's because Kahneman gets the signs wrong in the OP. Question 5a is: $900 @ 100%, or $1000 @ 90% Most people choose $900 @ 100% Question 5b is: -$1000 + $100 @ 100%, or -$1000 + $1000 @ 10% Most people choose -$1000 + $1000 @ 10% Written this way, the false symmetry vanishes, and we see that in both cases, people are risk averse when the payoff is low, and risk-seeking when the payoff is high. Which is to say, people value life-changing sums super-linearly as compared to insignificant sums.
- roel_v 15y ago
  But that's not what the research was about, if I'm understanding it correctly (the research has been mentioned a lot in popular economics literature, so I think that I am understanding it correctly, at least at the high level). The conclusion of the research is that people are more risk-averse when it comes to losses - i.e. they'd rather not win 100$ than loose 100$. If I'm understanding you correctly, you're saying it's about the amounts; and I think I'd have to agree with you that for the examples to be equivalent, the amounts in 5b should be multiplied by 10. But then again, maybe that would introduce another comprehension hurdle or cognitive correction effect which would render the experiment invalid. Interesting question to ask the original researchers, although I presume that by now (after decades) they've addressed it somewhere already :)
fhars 15y ago
It could also be that the utility of money is perceived to be logarithic, and then it depends on the base the individual uses in the personal utitlity function (which probably depends on the persons net worth) which choice is rational. For example, ln 900 > 0.9 * ln 1000.
- nl 15y ago
  This may well be true. But the point is that research has show that almost all people have this bias that makes them much more risk adverse when avoiding losses than when they don't already have the money. We can speculate a lot on the reasons, but that speculation isn't tested yet.
colanderman 15y ago
Ya, my theory holds for negative sums too -- I'd rather have a chance of not losing [large amount of money] than lose [almost as large amount of money] for sure. A $900 loss could be enough to bankrupt me -- I need to take the 10% chance.
- faboo 15y ago
  The problem with that question, to me, is that the 10% difference in outcome is nearly inconsequential. By the time I'm losing (or gaining) $900, what's another $100? If the proportions were different, I think the question would be more interesting.

X-Istence 15y ago

Yes, however there is a slight chance of winning the odds and not paying anything. The risk is minimal. If the numbers were further apart I don't think the same logic would kick in. A = $900 lost B = $9000 lost with a 90% chance Those are odds I wouldn't want to try. I would take the instant loss knowing that my odds are just not good enough to win if I were to choose B.

anothermachine 15y ago
you mean 10% chance, right?
neonkiwi 15y ago
The reason that $1000 at 90% odds and $900 at 100% odds are used in this example is the expected value is the same in both cases, making the situations 'equivalent'. A 90% chance of losing $9000 has an expected value of -$8100.
- erichocean 15y ago
  The way I read it is this: Do you want to be guaranteed you'll lose $900? Or do you want a 10% chance you'll lose nothing at all, with a 90% chance you'll lose another $100? So given a choice between being (nearly) totally wiped out, or having the chance of not being wiped out, people take the chance of keeping their cash. Makes sense to me.
  - mseebach 15y ago
    It seems odd to me that this disproves Bernoulli theory "that a person’s willingness to gamble a certain amount of money was a product of how that amount related to his overall wealth". If I could pull $900-$1000 from my savings with no immediate consequences, I'd be more likely to spend the $900 at 100%. But if loosing $900-$1000 means I'll have to tell my landlord I'll be late with the rent and then finding someone to borrow it from, and paying it back with interest, the extra $100 aren't significantly more crippling - it's the transaction cost of going through all this bother that's problematic - I'll take a 10% chance. Come to think of it, I actually did something like this: Prior to moving abroad a while ago, I consulted a lawyer to make sure I did everything right to avoid double taxation. That was a taking on a 100% chance of a rather big expense to avoid an unknown chance of an even larger expense.
  - ansible 15y ago
    Yes, I agree. I think 5b is very poorly framed, and doesn't show what it is puported to show in the linked article. I also agree that the reasoning changes a lot if this is a one-time event vs. a regular occurance.

anothermachine 15y ago

That's because Kahneman gets the signs wrong in the OP. Question 5a is: $900 @ 100%, or $1000 @ 90% Most people choose $900 @ 100% Question 5b is: -$1000 + $100 @ 100%, or -$1000 + $1000 @ 10% Most people choose -$1000 + $1000 @ 10% Written this way, the false symmetry vanishes, and we see that in both cases, people are risk averse when the payoff is low, and risk-seeking when the payoff is high. Which is to say, people value life-changing sums super-linearly as compared to insignificant sums.

roel_v 15y ago
But that's not what the research was about, if I'm understanding it correctly (the research has been mentioned a lot in popular economics literature, so I think that I am understanding it correctly, at least at the high level). The conclusion of the research is that people are more risk-averse when it comes to losses - i.e. they'd rather not win 100$ than loose 100$. If I'm understanding you correctly, you're saying it's about the amounts; and I think I'd have to agree with you that for the examples to be equivalent, the amounts in 5b should be multiplied by 10. But then again, maybe that would introduce another comprehension hurdle or cognitive correction effect which would render the experiment invalid. Interesting question to ask the original researchers, although I presume that by now (after decades) they've addressed it somewhere already :)

fhars 15y ago

It could also be that the utility of money is perceived to be logarithic, and then it depends on the base the individual uses in the personal utitlity function (which probably depends on the persons net worth) which choice is rational. For example, ln 900 > 0.9 * ln 1000.

nl 15y ago
This may well be true. But the point is that research has show that almost all people have this bias that makes them much more risk adverse when avoiding losses than when they don't already have the money. We can speculate a lot on the reasons, but that speculation isn't tested yet.

colanderman 15y ago

Ya, my theory holds for negative sums too -- I'd rather have a chance of not losing [large amount of money] than lose [almost as large amount of money] for sure. A $900 loss could be enough to bankrupt me -- I need to take the 10% chance.

faboo 15y ago
The problem with that question, to me, is that the 10% difference in outcome is nearly inconsequential. By the time I'm losing (or gaining) $900, what's another $100? If the proportions were different, I think the question would be more interesting.