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re: 20k guaranteed or coin flip for 100k?
Posted on 7/1/16 at 9:11 am to TigerstuckinMS
Posted on 7/1/16 at 9:11 am to TigerstuckinMS
quote:Make it $20 billion or a coin toss for $100billion.
See, I disagree. When you start playing the aversion to risk angle, you screw yourself
Not sure how you'd still disagree, right?
And the point is, that $20k is actually life changing to some people, so they won't throw it away on a 50/50 proposition.
1
Posted on 7/1/16 at 9:12 am to The Seaward
quote:
What if it was 20 million and 100 million instead of thousands? You still flipping the coin?
If emotion hasn't gotten to me, I do. At that value, I probably let emotion get to me and take the $20M.
It still doesn't change the fact that I'd be making the poorer choice.
Posted on 7/1/16 at 9:12 am to StrongBackWeakMind
quote:Good talks!!!
Ok
Posted on 7/1/16 at 9:12 am to shel311
quote:
And the point is, that $20k is actually life changing to some people, so they won't throw it away on a 50/50 proposition.
Right. If you have literally 0 financial stress in your life and a huge cushion it probably makes sense to flip the coin.
If you're a single mom with tight bills you'd be a maniac to flip the coin.
Posted on 7/1/16 at 9:12 am to Powerman
quote:
For me it's tough to pass up the guarantee even though it's not statistically the smart choice.
Hey, at least you realize it's not the smart choice.
This is also a hypothetical $20K that I don't have yet.
If someone asks me to fork up $20K out of my savings for a 50/50 shot at $100K... I'd have to think about it more, because in the 50/50 shot that I lose, I'm down $20K instead of exactly where I started.
Posted on 7/1/16 at 9:14 am to Powerman
quote:
Right. If you have literally 0 financial stress in your life and a huge cushion it probably makes sense to flip the coin.
If you're a single mom with tight bills you'd be a maniac to flip the coin.
Makes me wonder if we're learning a lot about OT posters in this thread.
I would take the guaranteed $20k even if the flip was for $1 million. I kinda need some extra money right now.
Posted on 7/1/16 at 9:14 am to slackster
quote:
Take it to the extreme then. $20k guarantee or a coin flip where heads wins you $1MM but if it's tails you owe $900k. EV of the flip is still $50k, so you flipping?
Now, you've changed the game. In this example, I have a risk of ruin that has to be factored in. In the prior example, none of the outcomes result in me losing any money.
Posted on 7/1/16 at 9:15 am to Powerman
quote:
Not when you only get to do it once
Like I said, it's so out of proportion. The risk is worth it - it straight up is. The only way it isn't is if $20k is life or death at the time of the flip. Then the risk becomes nonpecuniary.
See, with $40k, I probably take the guaranteed - even though I'm losing $10k in value, that may be how I price the risk. No one should value the risk higher than the principal, which is why folks who take the $20k based solely on valuation are not good at math.
Posted on 7/1/16 at 9:15 am to LSUBoo
quote:
This is also a hypothetical $20K that I don't have yet.
But it's guaranteed if you don't flip the coin.
quote:
If someone asks me to fork up $20K out of my savings for a 50/50 shot at $100K... I'd have to think about it more, because in the 50/50 shot that I lose, I'm down $20K instead of exactly where I started
Right. The funny thing is to have enough money where losing 20K on a whim isn't that big of a deal to you then gaining 100K probably really isn't that big of a deal to you either.
For most people the smart move with a sample size of 1 is to just take the money.
Posted on 7/1/16 at 9:16 am to StringedInstruments
quote:Because $50k is more than $20k. Not being an a-hole, that IS the answer to your question.
Help me understand why the $50k expected value is still better than $20k guaranteed?
quote:That's not the only outcome, there are 2 outcomes. The post you quoted mentioned "probabiliti and expected values"...so I'm not sure which of those you're not quite understanding.
If someone takes the flip and loses, the actual value is zero, right?
quote:Right, which is fine and it does change the equation. But if we're doing it purely by math, you go with the flip.
*I'm approaching this with the mindset that I need money as opposed to just having extra.
Posted on 7/1/16 at 9:16 am to Ace Midnight
quote:
Like I said, it's so out of proportion. The risk is worth it - it straight up is. The only way it isn't is if $20k is life or death at the time of the flip. Then the risk becomes nonpecuniary.
Wasn't there a report that over 60% of Americans couldn't survive a 2K emergency if they had to?
For most people the 20K is life changing enough to warrant making the statistically wrong choice.
Posted on 7/1/16 at 9:17 am to Jake88
quote:
Now, most people will take the flip. That's why most are idiots and choose poorly throughout their lives.
the coin flip is the smart play in terms of stats
quote:
I'd take the 20k. 100K is not life changing.
i think this argument also leads towards coin flip
if we were talking $2M v. $10M i'll violate the statistically optimal play b/c frick it, $2M and i retire
Posted on 7/1/16 at 9:18 am to TigerstuckinMS
quote:
If emotion hasn't gotten to me, I do. At that value, I probably let emotion get to me and take the $20M.
It still doesn't change the fact that I'd be making the poorer choice.
the smarter choice in this scenario is to take the $20M. The percentage of people who should flip decreases as the amount of money increases Posted on 7/1/16 at 9:18 am to Powerman
quote:
But according to the OP, you have $20K at stake. So the question is, really - Would you pay $20K for a 50% chance at $100,000?
Right. That's how you have to look at it.
To be fair, even if you view it that way the EV of the flip is still $30K ($80K * 50% + -$20k * 50%).
ETA: The above doesn't really calculate EV as much as it calculates the risk premium.
This post was edited on 7/1/16 at 9:44 am
Posted on 7/1/16 at 9:18 am to Powerman
quote:
For most people the smart move with a sample size of 1 is to just take the money.
No, for almost everyone, the smart move is to flip the coin.
Posted on 7/1/16 at 9:19 am to shel311
quote:
Right, which is fine and it does change the equation. But if we're doing it purely by math, you go with the flip.
Of course
But again even you'd throw that logic out the windo if you made the numbers bigger like 20 million and 100 million.
You wouldn't risk the 20 million on a coin flip unless you're already a billionaire.
Posted on 7/1/16 at 9:20 am to castorinho
quote:
The percentage of people who should flip decreases as the amount of money increases
agreed 100%
Posted on 7/1/16 at 9:20 am to SlowFlowPro
quote:Nah, $20k is a hell of a lot of money for some, it could go a long ways.
i think this argument also leads towards coin flip
Posted on 7/1/16 at 9:21 am to LSUBoo
quote:
No, for almost everyone, the smart move is to flip the coin.
Wrong. Most people are financially strapped. The 20K is a guarantee to improve their life situation.
Posted on 7/1/16 at 9:21 am to Powerman
quote:
For most people the 20K is life changing enough to warrant making the statistically wrong choice.
I'll give you something to ponder - folks for whom $20k would be "life changing" - the money becomes a risk it will enable negative behavior and make them worse off than they were before, IMHO. Of course, $100k would be even worse, potentially, because you can get into a lot more trouble with $100k than with $20k. One has to look no further than the PWT folks who have won massive lottery prizes. Many of those stories don't have what we would describe as happy endings.
So, I reiterate - taking the $20k means you are pricing the risk ($20k) greater than the delta in value ($30k) and that's some kind of crazy economics right there.
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