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Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

greg_V 2y ago
It's a convoluted way of saying "use value" vs. "exchange value". A million dollars is a million dollars, or it's a house. I don't need a million dollars but I do need a house or I freeze to death. I can't eat a million dollars worth of food but I need to eat food every day or I die. Gambling is seen as immoral because it's about extending your exchange value capabilities, although most people who gamble are poor as dirt and a winning bet is often about paying your utility bills and having a day out over being able to do neither (while losing bets contribute to being unable to do either). Insurance is seen as prudent because it acts as a fail safe over your use values, be it your health, housing, employment, etc. Social security is basically a system of spreading the odds over the population, forcing everyone to do the small bets to contain the catastrophic outlier probabilities - in theory.
- bluecalm 2y ago
  It doesn't really matter much if you have a million dollars or a million dollar house (+/- liquidity of assets but this is not really important for the discussion). >>Gambling is seen as immoral because it's about extending your exchange value capabilities Why would extending your exchange value capabilities would be seen as immoral? It sounds good to me. I think you are missing the point.
graemep 2y ago
Utility is quite a complex and badly defined concept - its also central to economics. The idea is that the value to you of an extra amount of money goes down as you have more. i.e. getting £10k could be life changing for a poor person, unnoticeable to a rich one. https://moneyterms.co.uk/utility/ https://moneyterms.co.uk/utility/ The expected value is the amount multiplied by the chance of getting it. SO if you have a 50% chance of getting £1,000 the expected value is £500. That GP comment is saying is that in the case of insurance the small risk of being wiped out financially vs the certain cost of premiums the expected value is negative (for insurers to be profitable) BUT because the effect on utility of losing a huge amount of money is so bad, the expected value of the utility is positive.
- pydry 2y ago
  Ive never seen a definition of utility which wasn't self referencing. It's a highly unscientific concept.
  - bluecalm 2y ago
    Utility of money is just how much value one (an individual or entity) can derive from having x amount of money. Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter. It doesn't make it problematic or unscientific. The point is that it matters how much certain amount of money or wealth is worth for you not how much wealth you have. It's an important point as it explains why calculations purely in money terms are useless for making financial decisions (as seen in example of insurance)
    - pydry 2y ago
      >Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter Precisely. Like when a priest says that "love" is "god" and "god" is "love". Plenty of our language is deeply unscientific.
      - bluecalm 2y ago
        It's not like that at all. If you want to argue that one can't define value then I am out. If you admit "value" has well understood meaning then utility function of wealth is just how much value one can derive from it. We usually measure wealth in money for convenience. I really don't know why you are so against it. There might be a lot of nonsense associate with it but the concept itself is pretty simple and useful.
  - JumpCrisscross 2y ago
    > never seen a definition of utility which wasn't self referencing It’s analogous to “holes” in semiconductors or virtual particles. You can’t directly observe it. But it’s an intuitive notion that makes many calculations easier. Critically, there are several valid definitions of utility, e.g. the von Neumann–Morgenstern (VNM) utility theorem [1] and revealed preference [2]. Each has its own axioms, defined with varying rigour, that can be theoretically extended and practically applied. > a highly unscientific concept Sure, it’s unscientific in the way mathematics are unscientific: it starts with a set of axioms and extends from that. Determining whether the chosen axioms fit a particular situation is a separate, more scientific question. That said, similar criticisms have been raised about e.g. auction theory and quantum physics, both of which (like utility-based models) make testable predictions. [1] https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenst... [2] https://en.m.wikipedia.org/wiki/Revealed_preference https://en.m.wikipedia.org/wiki/Revealed_preference
deleted 2y ago
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bluecalm 2y ago
>>Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms" Imagine you have $10k to your name and flip a coin for $1k. Your expected value in money terms is $9k * 0.5 + $11k * 0.5. Your expected value in utility terms is: u($9k) * 0.5 + u($11k) * 0.5 where u is a function that tells you how much worth you get from money. See wikipedia link for some explanation (although I think the articles are over-complicated and don't convey the point in clear way): https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Diminishing_marginal_utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Dimini... The key point is that utility is concave (a coin flip for any amount has negative utility) which is obvious when you think about it (better to be a millionaire than flip a coin to be busted or have 2 million net worth) but maybe not something most people think when making everyday decisions.
raincole 2y ago
If you have 10% chance to lose -$91 and 90% chance to get +$10, the expected value in money is -$0.1. It sounds bad. But the relationship between utility and money isn't linear. If for you, $10 is worth 10u and $91 is worth only 89u, this deal has expected value of +0.1u. Why and how isn't it linear? It's a hard problem that can't be answered easily. However we know it's true for most big institutions in stock and bond markets. A financial product will need to provide extra expected value in term of money to compensate the risk, otherwise no one buys it.
- LorenPechtel 2y ago
  In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar) than it gains (the next dollar.) That's why you should only engage in negative bets, aka insurance. There you are trading a next dollar (worth less) for a previous dollar (worth more).
  - GeorgeDewar 2y ago
    This has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value. I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for. But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
  - raincole 2y ago
    I don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.
CPLX 2y ago
A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that are unpredictable can be entertaining, which is why gambling is correctly viewed as a form of entertainment.
- bluecalm 2y ago
  But why is reducing variance desirable? It's exactly because there is utility of money function which is concave. Variance being undesirable comes from the shape of utility of money function.
  - beaeglebeachedd 2y ago
    And at some point that function bends hard once you hit bankruptcy, for instance many places in US you go to jail if you run out of money, especially if you have children with someone to whom you're not currently married.
  - CPLX 2y ago
    Yes that’s one factor. But there’s also a “going bust” factor which is kind of a fundamental dynamic as well. Think of it in terms of life. Once you are dead you’re dead, it’s the end. If the variance in your life outcomes “crosses the zero line” then the game ends, even if it’s just for an hour. You could bend your argument to cover that by arguing that the utility of that last little fraction tends to infinity. Like what would you exchange for the drink of water that would save your life if you were minutes from death? But it’s a bit strained, especially as a way to explain it to someone for whom utility is not already intuitive. I think it’s pretty easy to understand that excessive variance leads to death or very negative outcomes. All you need to demonstrate it is a houseplant and a supply of water, air, and sunshine. If you increase the variance of any of those three things sufficiently you quickly don’t have a houseplant any more, regardless of the average total supply.
- 2y ago

greg_V 2y ago

It's a convoluted way of saying "use value" vs. "exchange value". A million dollars is a million dollars, or it's a house. I don't need a million dollars but I do need a house or I freeze to death. I can't eat a million dollars worth of food but I need to eat food every day or I die. Gambling is seen as immoral because it's about extending your exchange value capabilities, although most people who gamble are poor as dirt and a winning bet is often about paying your utility bills and having a day out over being able to do neither (while losing bets contribute to being unable to do either). Insurance is seen as prudent because it acts as a fail safe over your use values, be it your health, housing, employment, etc. Social security is basically a system of spreading the odds over the population, forcing everyone to do the small bets to contain the catastrophic outlier probabilities - in theory.

bluecalm 2y ago
It doesn't really matter much if you have a million dollars or a million dollar house (+/- liquidity of assets but this is not really important for the discussion). >>Gambling is seen as immoral because it's about extending your exchange value capabilities Why would extending your exchange value capabilities would be seen as immoral? It sounds good to me. I think you are missing the point.

graemep 2y ago

Utility is quite a complex and badly defined concept - its also central to economics. The idea is that the value to you of an extra amount of money goes down as you have more. i.e. getting £10k could be life changing for a poor person, unnoticeable to a rich one. https://moneyterms.co.uk/utility/ https://moneyterms.co.uk/utility/ The expected value is the amount multiplied by the chance of getting it. SO if you have a 50% chance of getting £1,000 the expected value is £500. That GP comment is saying is that in the case of insurance the small risk of being wiped out financially vs the certain cost of premiums the expected value is negative (for insurers to be profitable) BUT because the effect on utility of losing a huge amount of money is so bad, the expected value of the utility is positive.

pydry 2y ago
Ive never seen a definition of utility which wasn't self referencing. It's a highly unscientific concept.
- bluecalm 2y ago
  Utility of money is just how much value one (an individual or entity) can derive from having x amount of money. Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter. It doesn't make it problematic or unscientific. The point is that it matters how much certain amount of money or wealth is worth for you not how much wealth you have. It's an important point as it explains why calculations purely in money terms are useless for making financial decisions (as seen in example of insurance)
  - pydry 2y ago
    >Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter Precisely. Like when a priest says that "love" is "god" and "god" is "love". Plenty of our language is deeply unscientific.
    - bluecalm 2y ago
      It's not like that at all. If you want to argue that one can't define value then I am out. If you admit "value" has well understood meaning then utility function of wealth is just how much value one can derive from it. We usually measure wealth in money for convenience. I really don't know why you are so against it. There might be a lot of nonsense associate with it but the concept itself is pretty simple and useful.
- JumpCrisscross 2y ago
  > never seen a definition of utility which wasn't self referencing It’s analogous to “holes” in semiconductors or virtual particles. You can’t directly observe it. But it’s an intuitive notion that makes many calculations easier. Critically, there are several valid definitions of utility, e.g. the von Neumann–Morgenstern (VNM) utility theorem [1] and revealed preference [2]. Each has its own axioms, defined with varying rigour, that can be theoretically extended and practically applied. > a highly unscientific concept Sure, it’s unscientific in the way mathematics are unscientific: it starts with a set of axioms and extends from that. Determining whether the chosen axioms fit a particular situation is a separate, more scientific question. That said, similar criticisms have been raised about e.g. auction theory and quantum physics, both of which (like utility-based models) make testable predictions. [1] https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenst... [2] https://en.m.wikipedia.org/wiki/Revealed_preference https://en.m.wikipedia.org/wiki/Revealed_preference

deleted 2y ago

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bluecalm 2y ago

>>Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms" Imagine you have $10k to your name and flip a coin for $1k. Your expected value in money terms is $9k * 0.5 + $11k * 0.5. Your expected value in utility terms is: u($9k) * 0.5 + u($11k) * 0.5 where u is a function that tells you how much worth you get from money. See wikipedia link for some explanation (although I think the articles are over-complicated and don't convey the point in clear way): https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Diminishing_marginal_utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Dimini... The key point is that utility is concave (a coin flip for any amount has negative utility) which is obvious when you think about it (better to be a millionaire than flip a coin to be busted or have 2 million net worth) but maybe not something most people think when making everyday decisions.

raincole 2y ago

If you have 10% chance to lose -$91 and 90% chance to get +$10, the expected value in money is -$0.1. It sounds bad. But the relationship between utility and money isn't linear. If for you, $10 is worth 10u and $91 is worth only 89u, this deal has expected value of +0.1u. Why and how isn't it linear? It's a hard problem that can't be answered easily. However we know it's true for most big institutions in stock and bond markets. A financial product will need to provide extra expected value in term of money to compensate the risk, otherwise no one buys it.

LorenPechtel 2y ago
In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar) than it gains (the next dollar.) That's why you should only engage in negative bets, aka insurance. There you are trading a next dollar (worth less) for a previous dollar (worth more).
- GeorgeDewar 2y ago
  This has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value. I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for. But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
- raincole 2y ago
  I don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.

CPLX 2y ago

A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that are unpredictable can be entertaining, which is why gambling is correctly viewed as a form of entertainment.

bluecalm 2y ago
But why is reducing variance desirable? It's exactly because there is utility of money function which is concave. Variance being undesirable comes from the shape of utility of money function.
- beaeglebeachedd 2y ago
  And at some point that function bends hard once you hit bankruptcy, for instance many places in US you go to jail if you run out of money, especially if you have children with someone to whom you're not currently married.
- CPLX 2y ago
  Yes that’s one factor. But there’s also a “going bust” factor which is kind of a fundamental dynamic as well. Think of it in terms of life. Once you are dead you’re dead, it’s the end. If the variance in your life outcomes “crosses the zero line” then the game ends, even if it’s just for an hour. You could bend your argument to cover that by arguing that the utility of that last little fraction tends to infinity. Like what would you exchange for the drink of water that would save your life if you were minutes from death? But it’s a bit strained, especially as a way to explain it to someone for whom utility is not already intuitive. I think it’s pretty easy to understand that excessive variance leads to death or very negative outcomes. All you need to demonstrate it is a houseplant and a supply of water, air, and sunshine. If you increase the variance of any of those three things sufficiently you quickly don’t have a houseplant any more, regardless of the average total supply.
2y ago