4 ms·

I hate the argument that, on the grounds that the aggregate money spent on lottery tickets is typically larger than the aggregate money paid out on lottery tick

by Chinjut 12y ago

I hate the argument that, on the grounds that the aggregate money spent on lottery tickets is typically larger than the aggregate money paid out on lottery tickets, purchasing a lottery ticket is inherently irrational. The same is true of insurance, yet few people consider the purchase of insurance to be intrinsically irrational by the same argument. People are free to have whatever preferences they want. Some people prefer a life with a slim possibility of a tremendous windfall (and but a negligible loss in the more likely alternative) to a life of certain continuation with the status quo grind. More power to them.

sopooneo 12y ago
There is a fundamental rationality to insurance that is not present with the lottery if you accept the marginal utility of money to an individual. Your top dollar is worth less to your than your bottom one. So it is worth sacrificing the first to safeguard the second.
dragonwriter 12y ago
> The same is true of insurance, yet few people consider the purchase of insurance to be intrinsically irrational by the same argument. The offsetting argument for insurance is that it provides risk management against unaffordable, catastrophic expenditures -- it is a trade-off of a certain expenses, against the risk of a much larger uncertain expense, with an expected net cost in financial terms, but that it is rational in some cases given the decreasing marginal utility of net income (which, conversely, means that there is an increasing marginal cost of high expenses.) Of course, the trade-off in the lottery is you are paying a certain, low cost for a chance at unlikely larger payoff -- this has not only a negative expected financial value, but -- given the declining marginal utility of income -- an even larger expected negative utility in most cases, considering utility of money on its own. Of course, it may be rational if the utility provided to a particular player by "playing the lottery" (the entertainment value, etc.) exceeds the expected net disutility associated with financial expectations.
- Chinjut 12y ago
  If some people do, in fact, prefer situations in which there is a slim chance of tremendous windfall and large chance of small loss to guaranteed status quo, who is the economist to tell them "No, no, this is incompatible with the theory of diminishing marginal vNM-utility. Your preferences are misguided!". Utility is just a construct for describing people's preferences; to turn around and demand that people's preferences ought change to match some textbook model of utility is to put the cart before the horse. People can reasonably have all kinds of different personal preferences, right? If your theory doesn't account for that, that may not be an example of muddled thinking on your subjects' part; it could just as well be a problem with your theory. I mean, what is actually factually misinformed about preferring the risk profile afforded by a lottery ticket to the alternative?
  - qq66 12y ago
    Because it's hard to imagine that anyone actually has a increasing marginal utility of money. If they did, over wide enough of a range, they'd bet their entire life savings on the Powerball. What's much more likely is that they're getting some entertainment out of playing the lottery, or they're poor calculators of risk and reward.
    - Chinjut 12y ago
      I don't have to imagine that anyone prefers occasionally playing the lottery to never playing the lottery. I can see it in action any time I please, and while some of the people doing so may be laboring under delusions as to the quantities involved, I see no reason to conclude that all are. (I will proffer myself as an example.) A person might well prefer the risk profile resulting from occasionally playing the lottery (small chance of tremendous gain, large chance of minor loss) to both the risk profile resulting from never playing the lottery (guarantee of no gain or loss) and the risk profile resulting from betting their entire life savings on Powerball (large chance of catastrophic loss, small chance of tremendous gain); these are all different risk profiles, so they can all perfectly well be valued arbitrarily differently. [And I do mean arbitrarily differently. What rule of rationality demands that anyone who might want to play the lottery from time to time for the risk profile it produces ought further prefer to bet their entire life savings on the lottery? Whoever claims that to be a rule of rationality, I say they're the irrational one.] Whether you would describe someone with such preferences as having "increasing utility of money" or not is up to you. But I see nothing problematic in having and acting on such preferences.
bhayden 12y ago
The same logic can't really apply to insurance - one is an investment with expected return, the other is risk mitigation.
- Chinjut 12y ago
  You are happy with insurance because you see it as reasonable to prefer the risk profile it offers over that of forgoing it. But one might just as well also prefer the risk profile offered by a lottery ticket over that of forgoing it. Why not prefer a slim chance of a tremendous windfall and large chance of negligible loss to a guaranteed status quo? People can prefer whatever they want.
aaron695 12y ago
> Yet few people consider the purchase of insurance to be intrinsically irrational by the same argument. I don't really know to many people who think this? Skipping some small attempts at loopholes for insurance ($300,000 of medical might return infinite benefit to oneself), yes it's stupid. Most intelligent people know this. Your argument goes all the way, want to spend 'all' your money on gambling (or insurance), more power to them? People can do as they wish, but I'm not big on perpetuating bad memes. The opposing argument is pretty simple, by not creating a false happiness through gambling people might create real happiness. By not waiting on that big win, people might work towards their happiness. IE save for that big trip and get something of long term value imagination could never give.

by Chinjut 12y ago

sopooneo 12y ago

There is a fundamental rationality to insurance that is not present with the lottery if you accept the marginal utility of money to an individual. Your top dollar is worth less to your than your bottom one. So it is worth sacrificing the first to safeguard the second.

dragonwriter 12y ago

> The same is true of insurance, yet few people consider the purchase of insurance to be intrinsically irrational by the same argument. The offsetting argument for insurance is that it provides risk management against unaffordable, catastrophic expenditures -- it is a trade-off of a certain expenses, against the risk of a much larger uncertain expense, with an expected net cost in financial terms, but that it is rational in some cases given the decreasing marginal utility of net income (which, conversely, means that there is an increasing marginal cost of high expenses.) Of course, the trade-off in the lottery is you are paying a certain, low cost for a chance at unlikely larger payoff -- this has not only a negative expected financial value, but -- given the declining marginal utility of income -- an even larger expected negative utility in most cases, considering utility of money on its own. Of course, it may be rational if the utility provided to a particular player by "playing the lottery" (the entertainment value, etc.) exceeds the expected net disutility associated with financial expectations.

Chinjut 12y ago
If some people do, in fact, prefer situations in which there is a slim chance of tremendous windfall and large chance of small loss to guaranteed status quo, who is the economist to tell them "No, no, this is incompatible with the theory of diminishing marginal vNM-utility. Your preferences are misguided!". Utility is just a construct for describing people's preferences; to turn around and demand that people's preferences ought change to match some textbook model of utility is to put the cart before the horse. People can reasonably have all kinds of different personal preferences, right? If your theory doesn't account for that, that may not be an example of muddled thinking on your subjects' part; it could just as well be a problem with your theory. I mean, what is actually factually misinformed about preferring the risk profile afforded by a lottery ticket to the alternative?
- qq66 12y ago
  Because it's hard to imagine that anyone actually has a increasing marginal utility of money. If they did, over wide enough of a range, they'd bet their entire life savings on the Powerball. What's much more likely is that they're getting some entertainment out of playing the lottery, or they're poor calculators of risk and reward.
  - Chinjut 12y ago
    I don't have to imagine that anyone prefers occasionally playing the lottery to never playing the lottery. I can see it in action any time I please, and while some of the people doing so may be laboring under delusions as to the quantities involved, I see no reason to conclude that all are. (I will proffer myself as an example.) A person might well prefer the risk profile resulting from occasionally playing the lottery (small chance of tremendous gain, large chance of minor loss) to both the risk profile resulting from never playing the lottery (guarantee of no gain or loss) and the risk profile resulting from betting their entire life savings on Powerball (large chance of catastrophic loss, small chance of tremendous gain); these are all different risk profiles, so they can all perfectly well be valued arbitrarily differently. [And I do mean arbitrarily differently. What rule of rationality demands that anyone who might want to play the lottery from time to time for the risk profile it produces ought further prefer to bet their entire life savings on the lottery? Whoever claims that to be a rule of rationality, I say they're the irrational one.] Whether you would describe someone with such preferences as having "increasing utility of money" or not is up to you. But I see nothing problematic in having and acting on such preferences.

bhayden 12y ago

The same logic can't really apply to insurance - one is an investment with expected return, the other is risk mitigation.

Chinjut 12y ago
You are happy with insurance because you see it as reasonable to prefer the risk profile it offers over that of forgoing it. But one might just as well also prefer the risk profile offered by a lottery ticket over that of forgoing it. Why not prefer a slim chance of a tremendous windfall and large chance of negligible loss to a guaranteed status quo? People can prefer whatever they want.

aaron695 12y ago

> Yet few people consider the purchase of insurance to be intrinsically irrational by the same argument. I don't really know to many people who think this? Skipping some small attempts at loopholes for insurance ($300,000 of medical might return infinite benefit to oneself), yes it's stupid. Most intelligent people know this. Your argument goes all the way, want to spend 'all' your money on gambling (or insurance), more power to them? People can do as they wish, but I'm not big on perpetuating bad memes. The opposing argument is pretty simple, by not creating a false happiness through gambling people might create real happiness. By not waiting on that big win, people might work towards their happiness. IE save for that big trip and get something of long term value imagination could never give.