Re:The quiz Daniel Kahneman wants you to fail
by SilasX on Friday January 06, 2012 @10:57AM
(#3433726)
Agree 100%. There is so much wrong with all of these questions, and that's only one of the things wrong with this particular one.
In addition to that, there's very good reason for someone to act differently when it's a gain vs. loss at stake. For one thing, this difference is the whole reason that an insurance industry can exist! (And insurance, in turn, is the only reason many kinds of utility-enhancing ventures can exist at all!)
I used to wonder what the point of insurance was when you could just bear the risk yourself, but then I had an insight (that no one else arguing with me managed to bring up):
Utility as a function of how much of a good G that you have, usually increases at a decreasing rate. The first n units provide more of a utility gain than the 2nd n units, and so on. For much the same reason, losing your first n units isn't as bad as losing the 2nd n units, and so on. (It may help to visualize U(n) as a logarithmic curve.)
This is why people can rationally regard it as better to have a guaranteed loss of (at least) N rather than a (1/x) chance of losing x times N, while not also buying a lottery ticket for N that offers a (1/x) chance of gaining x times N. And that, in turn, shows the fundamental asymmetry between insurance and gambling.
Kahnemann must be on the phone with VF right now demanding they correct this article in about ten places.
In addition to that, there's very good reason for someone to act differently when it's a gain vs. loss at stake. For one thing, this difference is the whole reason that an insurance industry can exist! (And insurance, in turn, is the only reason many kinds of utility-enhancing ventures can exist at all!)
I used to wonder what the point of insurance was when you could just bear the risk yourself, but then I had an insight (that no one else arguing with me managed to bring up):
Diminishing marginal utility implies increasing marginal disutility!
Utility as a function of how much of a good G that you have, usually increases at a decreasing rate. The first n units provide more of a utility gain than the 2nd n units, and so on. For much the same reason, losing your first n units isn't as bad as losing the 2nd n units, and so on. (It may help to visualize U(n) as a logarithmic curve.)
This is why people can rationally regard it as better to have a guaranteed loss of (at least) N rather than a (1/x) chance of losing x times N, while not also buying a lottery ticket for N that offers a (1/x) chance of gaining x times N. And that, in turn, shows the fundamental asymmetry between insurance and gambling.
Kahnemann must be on the phone with VF right now demanding they correct this article in about ten places.