If everybody had to choose between investing his savings in the lottery, or in index funds, then if you look at the very rich most of them will be lottery players, even though it was the worst choice.
I don’t have real world stats, but here’s a hypothetical scenario. Say there’s a world where there’s two options for making money: a lottery with a .0001 percent (1 in 1,000,000) chance of making a billion dollars (EV $1000), or an investment with a 100 percent chance of making a million dollars. The rational thing to do is invest, but the richest people will have bought lottery tickets. So will a great many broke people, but you won’t see them on the news.
careful with your utility function. You need utility to be linear over money to do expected value.
If your goal is to be a billionaire, the ev of the lottery is 1e-6 and the ev of the solid investment is 0. (assigning utility 1 to state of being billionaire and 0 otherwise)
For what it’s worth, I had stealthily edited my question - (“If everybody had” instead of “If everybody has”); I was trying to find a short illustration of the fact that a choice with a low expected value but a high variance will be overrepresented among those who got the highest value. It seems like I failed at being concise and clear :P
Heh, well I’ve got dyslexia so every now and then I’ll end up reading things as different to what they actually say. It’s more my dyslexia than your wording. XD
It seems like I failed at being concise and clear :P
Hmm, I wonder if being concise is all it’s cracked up to be. Concise messages usually have lower information content, so they’re actually less useful for narrowing down an idea’s location in idea-space. Thanks, I’m looking into effective communication at the moment and probably wouldn’t have realized the downside to being concise if you hadn’t said that.
If everybody had to choose between investing his savings in the lottery, or in index funds, then if you look at the very rich most of them will be lottery players, even though it was the worst choice.
Can you evidence that?
I don’t have real world stats, but here’s a hypothetical scenario. Say there’s a world where there’s two options for making money: a lottery with a .0001 percent (1 in 1,000,000) chance of making a billion dollars (EV $1000), or an investment with a 100 percent chance of making a million dollars. The rational thing to do is invest, but the richest people will have bought lottery tickets. So will a great many broke people, but you won’t see them on the news.
careful with your utility function. You need utility to be linear over money to do expected value.
If your goal is to be a billionaire, the ev of the lottery is 1e-6 and the ev of the solid investment is 0. (assigning utility 1 to state of being billionaire and 0 otherwise)
What is “Can you evidence that?” supposed to mean? Especially when talking about a hypothetical scenario …
Could you please make an effort to communicate clear questions?
(If you’re asking for clarification, then Normal_Anomaly’s explanation is what I meant)
Ah, I misread your comment, my apologies. I’ll retract my question.
For what it’s worth, I had stealthily edited my question - (“If everybody had” instead of “If everybody has”); I was trying to find a short illustration of the fact that a choice with a low expected value but a high variance will be overrepresented among those who got the highest value. It seems like I failed at being concise and clear :P
Heh, well I’ve got dyslexia so every now and then I’ll end up reading things as different to what they actually say. It’s more my dyslexia than your wording. XD
Hmm, I wonder if being concise is all it’s cracked up to be. Concise messages usually have lower information content, so they’re actually less useful for narrowing down an idea’s location in idea-space. Thanks, I’m looking into effective communication at the moment and probably wouldn’t have realized the downside to being concise if you hadn’t said that.