4 ms·
It's not logical. You can sell the 0-5m random option for more than 1m (more than 2m!). Or you can buy some sort of insurance where someone pays you if you get
by xenophanes 14y ago
It's not logical. You can sell the 0-5m random option for more than 1m (more than 2m!). Or you can buy some sort of insurance where someone pays you if you get a low roll, but you pay them if you get a high roll.
Taking 40% as much money (on average) is some really expensive risk mitigation. There are much, much better deals available.
For the larger amounts of money, the risk mitigation comes at a much higher price and is even more silly.
- rictic 14y agoI agree with your reasoning, but I don't think it's a strong objection to the above. You're assuming that they have the time and legal ability to mitigate the risk. The question, as asked, seems to suggest that the imagined payout would be immediate, with no opportunity to mitigate.
- tempestn 14y agoExactly. I mean, I assume people operated under the assumption that the risk was non-transferrable, so I can see the logic in taking $1M over 0-5. You're giving up some expected value in order to reduce risk. Especially when you take into account the diminishing marginal value of money, especially around the low to mid millions, it makes some sense. What doesn't, as you say, is considering a random amount between zero and 100 billion dollars in any way risky compared to $1M. You're probably more likely to take the $1M then to be struck by lighting than you are to take the random option and end up with less. (And even THEN, ending up with $900k isn't the end of the world, so the odds are even lower of a really unfortunate outcome.) So you're giving up an absolutely massive expected value in order to avoid a truly miniscule risk. This is risk-aversion at its most ridiculous IMO.