Why people make dumb financial decisions on purpose

Re:Why people make dumb financial decisions on purpose by UncleMeat on Saturday September 03, 2022 @01:03PM (#32703793)

This is a key observation in more practical concerns like retirement planning. Often, maximizing expected value isn't actually what you want. For somebody with a comfortable retirement portfolio you care a lot more about not running out of money than ending up with a huge amount when you die. So you'll choose strategies that might have worse expected values but limit the frequency of worst case scenarios.

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Re:Why people make dumb financial decisions on purpose by petercooper on Saturday September 03, 2022 @01:46PM (#32704257)

Rory Sutherland (behavioural science chap) made a similar point on travel. He says that when he must get to the airport on time, he takes the back roads that get him there in a guaranteed 30 minutes rather than take the freeway that will take 15 minutes 95% of the time but could be heavily congested (and inescapable) otherwise. Sometimes urgency and efficiency are at odds!

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Re:Why people make dumb financial decisions on purpose by nly on Sunday September 04, 2022 @07:04AM (#32711780)

But we live in a world of real time traffic reports and satnav, so ...just do what's best ok the day

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Re:Why people make dumb financial decisions on purpose by As_You_Wish on Thursday September 08, 2022 @03:43AM (#32762534)

I remember looking at real-time traffic reports, but they were not future time, which is what I needed. I had an appointment to make but 500 feet in front of me...horrible crash. No way out. Stuck for 45 minutes. Had I had future time instead of real-time, that would be the best solution.

Had I taken the back roads, if there was an accident, there would be tons of options to get to where I needed to go.

If you need to be somewhere at a certain time, do the tried and true 100% guaranteed way.

It's how it is.

So there's that.

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Re:Why people make dumb financial decisions on purpose by chmod600 on Saturday September 03, 2022 @02:54PM (#32704897)

Depends a lot on what the back roads are like, though. The freeway can be more reliable a lot of the time.

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Re:Why people make dumb financial decisions on purpose by incone123 on Saturday September 03, 2022 @04:27PM (#32705747)

You can turn around in the road if you encounter an accident on the back roads. Encounter one on the highway and you may be stuck until it's cleared. I always go back roads if I need to make a flight.

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Re:Why people make dumb financial decisions on purpose by whatshisface on Saturday September 03, 2022 @01:26PM (#32704060)

This can be captures pretty well by taking the logarithm of each outcome's dollar figure before computing the expected value, if you ever find yourself wanting to calculate how to balance a portfolio.

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Re:Why people make dumb financial decisions on purpose by fxtentacle on Saturday September 03, 2022 @03:45PM (#32705382)

Great idea. So you weight x10 the EV as +1 point.

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Re:Why people make dumb financial decisions on purpose by divbzero on Saturday September 03, 2022 @03:10PM (#32705041)

Isn’t it expected utility that matters, not expected value? From that standpoint taking $1 million guaranteed is rational unless you already have high net worth.

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Re:Why people make dumb financial decisions on purpose by hansvm on Sunday September 04, 2022 @12:21PM (#32714657)

That's an additional concern, but even if you have a flat "utility" scale you can use for comparisons, _expected_ value still isn't necessarily the thing you want to optimize.

Maximizing the min/max outcomes are common alternative preferences. Like, suppose I have a 1% chance of being tortured for a year and a 99% chance at being the next God-Emporer. I can't actually average those futures; I'll be in one or the other, and I might want to have a 0% chance of torture or if the odds are flipped maybe I'm okay with being tortured for the tiny chance at being God-Emporer.

Such preferences are hard to cover under the umbrella of maximizing expected utility because it introduces (neg)infinite utility to certain outcomes. Instead recognizing that you might be optimizing something else is a cleaner way to handle the problem.

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