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I really like Colin McMillen's comments on this matter: https://plus.google.com/107814003053721091970/posts/6sPpxMo6JTM https://plus.google.com/107814003053721

by tytso 14y ago

I really like Colin McMillen's comments on this matter: https://plus.google.com/107814003053721091970/posts/6sPpxMo6JTM https://plus.google.com/107814003053721091970/posts/6sPpxMo6... Some choice quotes from his Google+ post: "The lottery is not a tax on people who are bad at math. It's trading a little bit of expected-value for a lot of variance." "There are many other cases in real life where mean/variance tradeoffs arise, and there are perfectly plausible objective functions under which it makes sense to follow a policy that doesn't maximize expected value. The obvious example is insurance, where you pay a small bit of money each year to reduce the chance that you end up suddenly needing to pay a lot of money. Same with forming or joining a startup; on average you'll make less money than if you take a "normal" job, but there's some small chance that you'll have just joined the next Apple or Google and you'll end up rich.... "

haberman 14y ago
Yeah, when you think about it the lottery and insurance are surprisingly similar ideas, though a bit in reverse. Getting in an accident and winning the lottery are both unlikely. By buying insurance you remove the small chance of a large loss. By playing the lottery you create the small chance of a large win. Both reduce your expected value, and doing both even more so. If you buy both, your variance is still high but in the positive direction.
- batista 14y ago
  >Yeah, when you think about it the lottery and insurance are surprisingly similar ideas, though a bit in reverse. Getting in an accident and winning the lottery are both unlikely. Getting into an accident is far more likely. And everyone has health issues sooner or later, so the probability of that is 1.
  - JoeAltmaier 14y ago
    In fact, I've heard it said you are 7 times more likely to be hit by lightening, than to win the lottery. But I can't see how that could be: I've seen lottery winners, and on average they don't look toasted at all!
    - philwelch 14y ago
      The probability of being hit by lightning is massively diluted by the fact that most people don't live places where lightning is a serious threat. I've heard it's actually a serious risk some places.
    - Retric 14y ago
      Well I have been hit by lighting so it does not seem that far fetched ;-)
    - Fargren 14y ago
      When someone gets hit by lightning, you generally don't expect to see them again.
  - haberman 14y ago
    > Getting into an accident is far more likely. True, but I didn't say anything about the constants involved, just the shape of the problem. > And everyone has health issues sooner or later, so the probability of that is 1. That may be, but health insurance premiums only cover a certain window of time, during which you may or may not have health issues.
JoachimSchipper 14y ago
One common assumption is that utility is logarithmic in money, i.e. that you become "one unit happier" not by adding $100K but by doubling your income. This matches actual human behavior fairly well, and implies that you should buy insurance (losing everything is really bad) but not lottery tickets (winning $BIGNUM makes you less happy than you'd think).
- Kuiper 14y ago
  Actually, according to this article, certain kinds of insurance are less effective at optimizing happiness, because we are psychologically equipped to adapt to new (bad) circumstances: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%20(2011).pdf http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WIL... (page 6 for remarks on insurance) Obviously, certain kinds of disaster pose a greater threat to happiness than others. For example, health insurance may be a worthwhile investment for some, while property insurance may not.
lunchbox 14y ago
> on average you'll make less money [in a startup] than if you take a "normal" job I disagree. If he's using "average" in the sense of "mean" (not median), then he's saying that starting a startup has a lower expected return and is higher risk than working a normal job, meaning it's inferior in both regards (assuming diminishing marginal utility). Entrepreneurship is a classic "high risk, high return" venture. It has a higher expected return than a conventional job; that's what makes it financially attractive to founders and VCs in the first place. The astronomical success of the minority offsets the lack of success of the majority. In a similar vein I disagree with his assertion that joining a startup (taking a risk) is like buying insurance (avoiding a risk). They are opposites.
- batista 14y ago
  >It has a higher expected return than a conventional job; that's what makes it financially attractive to founders and VCs in the first place. In the exact same sense than a lottery has a "higher expected return that a conventional job", just with slightly better odds. >The astronomical success of the minority offsets the lack of success of the majority. That doesn't make sense. Except in the light of something lke the Dunning-Krueger effect, where most people involved in startups expect they will be that "minority".
  - lunchbox 14y ago
    >In the exact same sense than a lottery has a "higher expected return that a conventional job", just with slightly better odds. A lottery has negative expected return, so I disagree that it's "higher expected return that a conventional job".
    - batista 14y ago
      >A lottery has negative expected return, so I disagree that it's "higher expected return that a conventional job". Well, doesn't a startup also have the same "negative expected return"? Or, actually, much worse? (Considering that the majority of them fail and the money you could make just working for some company in the same time). If anything, starting a startup is an investment.
antris 14y ago
"Some choice quotes from his Google+ post: 'The lottery is not a tax on people who are bad at math. It's trading a little bit of expected-value for a lot of variance.'" If you want high variance, wouldn't you then want to make high-risk investments in the stock market? I'm not very knowledgeable on the subject, but my understanding is that the expected value rises with increased variance on the stock market, rather than decreasing.
- adrianN 14y ago
  Investing five bucks into a lottery ticket is much easier than investing five bucks into high risk stocks.
brlewis 14y ago
People in Colin's circles are probably not the desperate, poor, uneducated lottery players that opponents of the lottery are concerned about. Colin's right not to judge his friends who choose to entertain themselves with the lottery fantasy every so often. They can afford it.

by tytso 14y ago

haberman 14y ago

Yeah, when you think about it the lottery and insurance are surprisingly similar ideas, though a bit in reverse. Getting in an accident and winning the lottery are both unlikely. By buying insurance you remove the small chance of a large loss. By playing the lottery you create the small chance of a large win. Both reduce your expected value, and doing both even more so. If you buy both, your variance is still high but in the positive direction.

batista 14y ago
>Yeah, when you think about it the lottery and insurance are surprisingly similar ideas, though a bit in reverse. Getting in an accident and winning the lottery are both unlikely. Getting into an accident is far more likely. And everyone has health issues sooner or later, so the probability of that is 1.
- JoeAltmaier 14y ago
  In fact, I've heard it said you are 7 times more likely to be hit by lightening, than to win the lottery. But I can't see how that could be: I've seen lottery winners, and on average they don't look toasted at all!
  - philwelch 14y ago
    The probability of being hit by lightning is massively diluted by the fact that most people don't live places where lightning is a serious threat. I've heard it's actually a serious risk some places.
  - Retric 14y ago
    Well I have been hit by lighting so it does not seem that far fetched ;-)
  - Fargren 14y ago
    When someone gets hit by lightning, you generally don't expect to see them again.
- haberman 14y ago
  > Getting into an accident is far more likely. True, but I didn't say anything about the constants involved, just the shape of the problem. > And everyone has health issues sooner or later, so the probability of that is 1. That may be, but health insurance premiums only cover a certain window of time, during which you may or may not have health issues.

JoachimSchipper 14y ago

One common assumption is that utility is logarithmic in money, i.e. that you become "one unit happier" not by adding $100K but by doubling your income. This matches actual human behavior fairly well, and implies that you should buy insurance (losing everything is really bad) but not lottery tickets (winning $BIGNUM makes you less happy than you'd think).

Kuiper 14y ago
Actually, according to this article, certain kinds of insurance are less effective at optimizing happiness, because we are psychologically equipped to adapt to new (bad) circumstances: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%20(2011).pdf http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WIL... (page 6 for remarks on insurance) Obviously, certain kinds of disaster pose a greater threat to happiness than others. For example, health insurance may be a worthwhile investment for some, while property insurance may not.

lunchbox 14y ago

> on average you'll make less money [in a startup] than if you take a "normal" job I disagree. If he's using "average" in the sense of "mean" (not median), then he's saying that starting a startup has a lower expected return and is higher risk than working a normal job, meaning it's inferior in both regards (assuming diminishing marginal utility). Entrepreneurship is a classic "high risk, high return" venture. It has a higher expected return than a conventional job; that's what makes it financially attractive to founders and VCs in the first place. The astronomical success of the minority offsets the lack of success of the majority. In a similar vein I disagree with his assertion that joining a startup (taking a risk) is like buying insurance (avoiding a risk). They are opposites.

batista 14y ago
>It has a higher expected return than a conventional job; that's what makes it financially attractive to founders and VCs in the first place. In the exact same sense than a lottery has a "higher expected return that a conventional job", just with slightly better odds. >The astronomical success of the minority offsets the lack of success of the majority. That doesn't make sense. Except in the light of something lke the Dunning-Krueger effect, where most people involved in startups expect they will be that "minority".
- lunchbox 14y ago
  >In the exact same sense than a lottery has a "higher expected return that a conventional job", just with slightly better odds. A lottery has negative expected return, so I disagree that it's "higher expected return that a conventional job".
  - batista 14y ago
    >A lottery has negative expected return, so I disagree that it's "higher expected return that a conventional job". Well, doesn't a startup also have the same "negative expected return"? Or, actually, much worse? (Considering that the majority of them fail and the money you could make just working for some company in the same time). If anything, starting a startup is an investment.

antris 14y ago

"Some choice quotes from his Google+ post: 'The lottery is not a tax on people who are bad at math. It's trading a little bit of expected-value for a lot of variance.'" If you want high variance, wouldn't you then want to make high-risk investments in the stock market? I'm not very knowledgeable on the subject, but my understanding is that the expected value rises with increased variance on the stock market, rather than decreasing.

adrianN 14y ago
Investing five bucks into a lottery ticket is much easier than investing five bucks into high risk stocks.

brlewis 14y ago

People in Colin's circles are probably not the desperate, poor, uneducated lottery players that opponents of the lottery are concerned about. Colin's right not to judge his friends who choose to entertain themselves with the lottery fantasy every so often. They can afford it.