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Would you rather have a 1% chance at a billion dollars or a guaranteed million? The former has a 10x higher expected value but I think most people would choose
by defen 12y ago
Would you rather have a 1% chance at a billion dollars or a guaranteed million? The former has a 10x higher expected value but I think most people would choose the latter.
- TTPrograms 12y agoI love examples like this. My interpretation of this generally depends on an idea of "Expected Impact", where ex. the difference between $10^6 and $10^9 in terms of lifestyle impact can be smaller than the difference between $10^3 and $10^6. You could assume a logarithmic value function, for example, but each person might have a different function depending on what you would do with the money. Not that people actually think that way, but you can construct a model where the guaranteed million is the rational choice.
- markpundmann 12y agoWhat your talking about is commonly referred to in economics as diminishing marginal returns. The first $1000 is much more useful than the second. Also, your interpretation of "expected impact" is what we call economic utility, which is commonly put in a cobbs douglas utility function (utility = (some_number > 1)^(1 > some_number > 0).