3 ms·

There's no problem here at all; except perhaps the wildly absurd fantasy of "perfectly rational (and/or intelligent) markets," which the popularity of e.g. lott

by jrm4 3y ago

There's no problem here at all; except perhaps the wildly absurd fantasy of "perfectly rational (and/or intelligent) markets," which the popularity of e.g. lotteries and casinos immediately disproves. Not much to see here.

hcks 3y ago
Your comment has no substance
mattmaroon 3y ago
Neither of those are markets, and the fact that dumb money exists in markets doesn’t change the fact that they are rational on balance because smart money will eat the dumb money fairly quickly.
UncleMeat 3y ago
The number of people who have told me "because betting markets have Trump at X% in 2024, that's the odds that he wins" in the past six months is staggering. I think some distribution of the idea that betting markets aren't actually pure likelihood estimators is a good thing.
- deleted 3y ago
  [deleted]
aleph_minus_one 3y ago
> There's no problem here at all; except perhaps the wildly absurd fantasy of "perfectly rational (and/or intelligent) markets," which the popularity of e.g. lotteries and casinos immediately disproves. Not much to see here. The behaviour of customers of lotteries is indeed clearly not perfectly rational if you consider the monetary expected value of your wins. On the other hand, the customers' behaviour gets much more rational if you consider the customer's utility function: a huge lottery win has a disproportional benefit for the customer with respect to the customer's utility function (since the lottery win will hopefully change the customer's life). In other words: what the customer optimizes for is the expected value of his utility function.
- kqr 3y ago
  I have heard this argument before but I don't get it. Especially since evidence seems to show people generally have concave utility for money. (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies.) What is the exact shape of the convex utility function you theorise these people have? And what data supports that?
  - aleph_minus_one 3y ago
    > (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies. Indemnity insurance and lotteries are actually symmetric to each other: indemnity insure is about preventing big losses in a rare event, and lotteries are about winning big in a rare event. The central difference is that the behaviour of people with respect to wins and losses is not symmetric, that is why insurance policies and lotteries are marketed quite differently. > What is the exact shape of the convex utility function you theorise these people have? And what data supports that? I am very sure that big lottery companies have data available to answer this question, but they won't make the data available. So I honestly admit that I don't know the answer, but I can propose an experiment how one might get a partial answer: Create some lottery offers, paying out, say, 1000, 10.000, 100.000, 1.000.000, 10.000.000 $ with probabilities such that the expected payout is 5 $ for each of them. Now sell/auction the lottery tickets and look what prices customers are willing to pay. This should give a rough idea how the utility function might look like.
    - kqr 3y ago
      You mean the expected payout is -$5, right? Otherwise the rational person with decent means -- even with a very concave utility -- would pay near $5 for that ticket, and this would be a Kelly-correct investment. The discussion was specifically about negative-EV lotteries since those are the ones that require convex utility.
      - aleph_minus_one 3y ago
skybrian 3y ago
It might be a problem for the argument that prediction markets are socially useful rather than just a way to have fun? On the other hand, maybe they're somewhat useful as a rough indicator.
HDThoreaun 3y ago
Lotteries are rational when you consider the entertainment value. Most lottery players dont expect to win, but as long as theres the possibility it allows them to daydream about what they would do if they did.
- brlewis 3y ago
  Citation please. Rational entertainment would predict poorer people playing the lottery less than rich people, which afaik is not how it happens.
  - kqr 3y ago
    Lotteries are a comparatively cheap form of entertainment. Rich people can go to tennis matches, get a pilot's licence, and buy stock options. Poor people have much fewer alternatives.
    - brlewis 3y ago
      $412/year doesn't seem that cheep to me. I think the less educated are being fooled into chasing extreme low-probability prizes. https://bigthink.com/the-present/poor-americans-lottery/ https://bigthink.com/the-present/poor-americans-lottery/
  - HDThoreaun 3y ago
    The prospect of becoming rich isn’t as enticing when you’re already rich. What would a rich person who wins the lottery do? Quit their job I guess but mostly quality of life unchanged. They already have most of what they want. Not the case for poor people.
- kqr 3y ago
  Indeed. Negative-sum games (like lotteries) are a form of consumption. From the player's perspective they should be compared to other forms of consumption like buying a beer or a rollercoaster ride. You do it for temporary pleasure, not as an investment. Most players are fully aware of this, just as most beer-drinkers drink in moderation. (See Brenner, Brenner & Brown for more data.)
somenameforme 3y ago
The magic of a prediction market with a reasonable sampling of people is that the players don't need to be rational, for things that are publicly decided. Imagine every person who went to vote, also bet in a prediction market based on nothing except who they wanted to win - the prediction market would be right 100% of the time. And it'd similarly be right most of the time, with a good random sample. That said, even for things that aren't publicly decided - the 'wisdom of the masses' [1] is very real and kind of weird phenomena. If you get people to try to guess how many beans are in a large jar, you'll get some people making really stupid guesses like 100, or a million. Yet when you average out the result over all answers, it tends to be extremely close to the right answer. At least unless you let people collaborate, then the effect disappears and we become stupid again. Kind of explains a lot of things. [1] - https://en.wikipedia.org/wiki/Wisdom_of_the_crowd#Examples https://en.wikipedia.org/wiki/Wisdom_of_the_crowd#Examples

by jrm4 3y ago

hcks 3y ago

Your comment has no substance

mattmaroon 3y ago

Neither of those are markets, and the fact that dumb money exists in markets doesn’t change the fact that they are rational on balance because smart money will eat the dumb money fairly quickly.

UncleMeat 3y ago

The number of people who have told me "because betting markets have Trump at X% in 2024, that's the odds that he wins" in the past six months is staggering. I think some distribution of the idea that betting markets aren't actually pure likelihood estimators is a good thing.

deleted 3y ago
[deleted]

aleph_minus_one 3y ago

> There's no problem here at all; except perhaps the wildly absurd fantasy of "perfectly rational (and/or intelligent) markets," which the popularity of e.g. lotteries and casinos immediately disproves. Not much to see here. The behaviour of customers of lotteries is indeed clearly not perfectly rational if you consider the monetary expected value of your wins. On the other hand, the customers' behaviour gets much more rational if you consider the customer's utility function: a huge lottery win has a disproportional benefit for the customer with respect to the customer's utility function (since the lottery win will hopefully change the customer's life). In other words: what the customer optimizes for is the expected value of his utility function.

kqr 3y ago
I have heard this argument before but I don't get it. Especially since evidence seems to show people generally have concave utility for money. (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies.) What is the exact shape of the convex utility function you theorise these people have? And what data supports that?
- aleph_minus_one 3y ago
  > (Under the assumption of concave utility, insurance is a better deal than it seems, but lotteries a worse deal than they seem -- even when one diversifies. Indemnity insurance and lotteries are actually symmetric to each other: indemnity insure is about preventing big losses in a rare event, and lotteries are about winning big in a rare event. The central difference is that the behaviour of people with respect to wins and losses is not symmetric, that is why insurance policies and lotteries are marketed quite differently. > What is the exact shape of the convex utility function you theorise these people have? And what data supports that? I am very sure that big lottery companies have data available to answer this question, but they won't make the data available. So I honestly admit that I don't know the answer, but I can propose an experiment how one might get a partial answer: Create some lottery offers, paying out, say, 1000, 10.000, 100.000, 1.000.000, 10.000.000 $ with probabilities such that the expected payout is 5 $ for each of them. Now sell/auction the lottery tickets and look what prices customers are willing to pay. This should give a rough idea how the utility function might look like.
  - kqr 3y ago
    You mean the expected payout is -$5, right? Otherwise the rational person with decent means -- even with a very concave utility -- would pay near $5 for that ticket, and this would be a Kelly-correct investment. The discussion was specifically about negative-EV lotteries since those are the ones that require convex utility.
    - aleph_minus_one 3y ago

skybrian 3y ago

It might be a problem for the argument that prediction markets are socially useful rather than just a way to have fun? On the other hand, maybe they're somewhat useful as a rough indicator.

HDThoreaun 3y ago

Lotteries are rational when you consider the entertainment value. Most lottery players dont expect to win, but as long as theres the possibility it allows them to daydream about what they would do if they did.

brlewis 3y ago
Citation please. Rational entertainment would predict poorer people playing the lottery less than rich people, which afaik is not how it happens.
- kqr 3y ago
  Lotteries are a comparatively cheap form of entertainment. Rich people can go to tennis matches, get a pilot's licence, and buy stock options. Poor people have much fewer alternatives.
  - brlewis 3y ago
    $412/year doesn't seem that cheep to me. I think the less educated are being fooled into chasing extreme low-probability prizes. https://bigthink.com/the-present/poor-americans-lottery/ https://bigthink.com/the-present/poor-americans-lottery/
- HDThoreaun 3y ago
  The prospect of becoming rich isn’t as enticing when you’re already rich. What would a rich person who wins the lottery do? Quit their job I guess but mostly quality of life unchanged. They already have most of what they want. Not the case for poor people.
kqr 3y ago
Indeed. Negative-sum games (like lotteries) are a form of consumption. From the player's perspective they should be compared to other forms of consumption like buying a beer or a rollercoaster ride. You do it for temporary pleasure, not as an investment. Most players are fully aware of this, just as most beer-drinkers drink in moderation. (See Brenner, Brenner & Brown for more data.)

somenameforme 3y ago

The magic of a prediction market with a reasonable sampling of people is that the players don't need to be rational, for things that are publicly decided. Imagine every person who went to vote, also bet in a prediction market based on nothing except who they wanted to win - the prediction market would be right 100% of the time. And it'd similarly be right most of the time, with a good random sample. That said, even for things that aren't publicly decided - the 'wisdom of the masses' [1] is very real and kind of weird phenomena. If you get people to try to guess how many beans are in a large jar, you'll get some people making really stupid guesses like 100, or a million. Yet when you average out the result over all answers, it tends to be extremely close to the right answer. At least unless you let people collaborate, then the effect disappears and we become stupid again. Kind of explains a lot of things. [1] - https://en.wikipedia.org/wiki/Wisdom_of_the_crowd#Examples https://en.wikipedia.org/wiki/Wisdom_of_the_crowd#Examples