4 ms·
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, wh
by 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 agoBecause 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 agoI 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.