From: Philip Goetz (philgoetz@gmail.com)
Date: Fri Feb 24 2006 - 10:14:18 MST
On 2/24/06, Dani Eder <danielravennest@yahoo.com> wrote:
> The expected return in dollars may be less than one,
> but the utility in 'happiness' may be positive.
What you are really saying is that we have no way of
measuring utility, since dollars are our only numeric
way of measuring it.
>$600K invested at 6% real return yields a more than
>minimum-wage lifestyle for you and a stream of
>descendants or family members. The accumulated
>stream of happiness (not having to work at a job)
>eventually would be enough to exceed the cost.
I think most lottery winnings are paid in installments, not as a lump
sum, so the person can't invest that million dollars. (In other
words, the person told that they've won a million dollars has really
won something closer to, I don't know, $250,000 (before taxes).)
More to the point, this argument ignores the fact that
the dollars spent on lottery tickets also would have
yielded interest. If we can measure utility in dollars,
and my expected number of dollars after an action
is lower than my expected number without that action,
then the expected utility after accruing interest is
still lower. If we can't measure utility in dollars,
you can appeal to the thrill of gambling, but you
can't appeal to the accrued interest on dollars.
> The real reasons people buy
> lottery tickets is (a) they derive positive mental
> feelings from the hope of winning and the excitement
> of watching the results, and (b) humans are bad at
> estimating the probability of low probability
> events.
This is the usual explanation given - people are stupid. I have just
presented an explanation of how buying lottery tickets and becoming
addicted to crack may be rational actions. My explanation lets us
understand crack addiction in terms of economic theory, and hence lets
us know how to reduce crack addiction, whereas the "people are stupid"
theory does not.
- Phil
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