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Actually, this reasoning is completely wrong. """ Your time is $1000/hour, and you need to act accordingly. Here’s why: Let’s say as a consultant who normall

Actually, this reasoning is completely wrong. """ Your time is $1000/hour, and you need to act accordingly. Here’s why: Let’s say as a consultant who normally charges $150/hour you stumble upon a weird client who asks for the following terms: “We agree your time is worth $150/hour. However, we can’t pay you for four years, at which time we will pay you in one lump sum.” How much should you increase your hourly rate to make these terms worthwhile? But “lost interest” and a premium doesn’t solve the biggest problem with these terms. The problem is: What if this company goes out of business in four years and doesn’t pay you at all? Supposing this client is an early-stage startup — even if funded — the most likely event is that they stiff you! Because they’re dead. Let’s suppose for the sake of rhetoric there’s a 15% chance the company will exist in four years and pay their bill. """ The article then goes on to reason that, therefore, you should value your time at $1000 per hour with this company. But there's a problem. IF the company goes bankrupt, then EVERY hour of time you spend with them is worthless, and you should reduce to to 0. IF the company doesn't go bankrupt, then any number of hours at, say, $300/hour, is worth it for you. In the first case, if you bill at $1000, the company is just as willing to use lots of your time. If it makes it, it takes off; if it doesn't make it, it's not stuck with the bill. Absent all other market conditions, if you are a monopolist in what they want to do with you, and they NEED 40 hours of your time to survive, that is how much they will take at $40, $80, $120, and $150 or $1000 per hour. If they believe they can use those forty hours to raise $15million in the next 4 years, they might even "agree" to $150,000 per hour. It doesn't matter. No matter what your price, in this scenario you are out the same 40 hours if you play ball with them. It's like winning the lottery. It doesn't matter if the expected value is over $1 per $1 ticket, if the chance of winning is the same. Your utility is massive if you win, you're out $1 if you lose. False reasoning.

chimeracoder 15y ago
(I avoid reposting/relinking, but it seems that this theme has been coming up a lot on HN recently.) What you're getting at is the concept of risk-benefit analysis, which is a bit more subtle than just the expected (dollar) value of the result. I describe it in more (academic) detail here: http://news.ycombinator.com/item?id=3432356 http://news.ycombinator.com/item?id=3432356
- its_so_on 15y ago
  it's not just that. when there's a big jackpot at a casino at the slot machines (i.e. the jackpot hasn't been paid for a long, long time) and it is so large that the expected value of each drop of a quarter actually has positive expected value, by enough of a margin, someone with a huge bankroll comes along and hires teams of people to monopolize the slot machines until one wins, paying them by the hour. you can't do that. so, when you're faced with depositing a quarter, does it really matter if the expected value is positive or negative? No, due to the variance - not due to how risk-averse you are, simply due to the variance. Likewise at a startup: you only have one life, in which you can only do so many. The more you can do, the less the variance and the more the expected value comes into play. Of course Microsoft or Warren Buffett would never 'invest' in lottery tickets when these have a negative expected value; they can buy hundreds of thousands or millions of them. When I buy one lottery ticket, I can buy one, or ten, but basically I have just one. Only the variance matters. it's not about risk-averse or -tolerant. it's about utility. people who say "math is a tax on people who are bad at math" simply don't know what they're talking about. People who are stuck in a hopeless life that would be changed by $1 million have just as rational a reason to play the lottery given a negative or positive expected return. one wonders if the lottery had to be subsidized by corporations, and everyone could only buy one to five tickets (if they wanted) each with an expected value slightly above one, then would mathematicians start buying 5 lottery tickets each? It has nothing to do with risk-benefit ratio. Even if God could somehow guarantee you access to googolplex googolplex googolplex dollars, but there was only a one in googolplex googolplex chance of your winning it, it would not even be worth the breath to say 'ok' -- try saying that googolplex times -- let alone a penny. Yet the expected value of that proposition is googolplex dollars! So, it's a false 'rationally' to claim that it is worth far more than a penny (given God's guarantee). it's worth nothing. it's not about risk-averse or whatever. it's simple rationality as an agent who experiences utility here on Earth. God's proposition is worthless.

chimeracoder 15y ago

(I avoid reposting/relinking, but it seems that this theme has been coming up a lot on HN recently.) What you're getting at is the concept of risk-benefit analysis, which is a bit more subtle than just the expected (dollar) value of the result. I describe it in more (academic) detail here: http://news.ycombinator.com/item?id=3432356 http://news.ycombinator.com/item?id=3432356

its_so_on 15y ago
it's not just that. when there's a big jackpot at a casino at the slot machines (i.e. the jackpot hasn't been paid for a long, long time) and it is so large that the expected value of each drop of a quarter actually has positive expected value, by enough of a margin, someone with a huge bankroll comes along and hires teams of people to monopolize the slot machines until one wins, paying them by the hour. you can't do that. so, when you're faced with depositing a quarter, does it really matter if the expected value is positive or negative? No, due to the variance - not due to how risk-averse you are, simply due to the variance. Likewise at a startup: you only have one life, in which you can only do so many. The more you can do, the less the variance and the more the expected value comes into play. Of course Microsoft or Warren Buffett would never 'invest' in lottery tickets when these have a negative expected value; they can buy hundreds of thousands or millions of them. When I buy one lottery ticket, I can buy one, or ten, but basically I have just one. Only the variance matters. it's not about risk-averse or -tolerant. it's about utility. people who say "math is a tax on people who are bad at math" simply don't know what they're talking about. People who are stuck in a hopeless life that would be changed by $1 million have just as rational a reason to play the lottery given a negative or positive expected return. one wonders if the lottery had to be subsidized by corporations, and everyone could only buy one to five tickets (if they wanted) each with an expected value slightly above one, then would mathematicians start buying 5 lottery tickets each? It has nothing to do with risk-benefit ratio. Even if God could somehow guarantee you access to googolplex googolplex googolplex dollars, but there was only a one in googolplex googolplex chance of your winning it, it would not even be worth the breath to say 'ok' -- try saying that googolplex times -- let alone a penny. Yet the expected value of that proposition is googolplex dollars! So, it's a false 'rationally' to claim that it is worth far more than a penny (given God's guarantee). it's worth nothing. it's not about risk-averse or whatever. it's simple rationality as an agent who experiences utility here on Earth. God's proposition is worthless.