I do appreciate the "display a big bag of money" step, but I still feel that this is insufficient to change people's core belief that they wont get paid the big money! (Possibly I have not overcome my confirmation bias with respect to this belief, though!)Displaying a big bag of money to me would just make me recheck my math, thinking "what the heck do they know that I don't?" Surely, no one would offer a bet of negative expected gain to them...so something suspicious must be going on!I hope I am not being stubborn on this point...also I admit have not read the entire article (it is quite long...talk about info processing).Expand full comment
 If you calculate the expected value of the most likely 99.9999% of the outcomes it is only \$10. The most likely 99.9% and it is only \$5.To get an expected value that is reasonable by reppeatedly betting, you would have to include the value of your time. At any reasonable value of your time the expected value becomes very low.Expand full comment
 If change in risk aversion doesn't explain why the poorer participants were even more irrational than the richer participants, then what is going on? The probabilities are the same for both group, are they not, so shouldn't they neglect them equally...?Expand full comment
 I agree entirely with Dan about this inclusion... in fact may I suggest scrolling down: http://en.wikipedia.org/wik...Dog of Justice also mentions this later down...the true expected value of St. Petersburg "Paradox" is actually a quite reasonable \$10 or so, because the tail probabilities of earning zillions are CORRECTLY ignored (set to 0%, because they would literally never be paid).Expand full comment
 Subjects are acting as if the experimenter can't pay more than 16 Euros! And yet they showed they could pay what was promised by displaying a big bag of money.Expand full comment
 Uh, isn't the dominant factor here counterparty risk? I.e. if you flip 50+ heads in a row, the guy offering the bet will only be able to afford to pay you as if you flipped ~20, so even without logarithmic utility this bet isn't worth more than 20.Expand full comment
 I agree with Robin. Manipulating the shape of these unobservable utility functions can't explain away something like this. More likely the cognitive load of imagining very low probability events outways the benefits of considering them (in some sort of rational manner).There is a case for considering humans as not only utility maximizers, but also as embodiments of the principle of least effort.Expand full comment
 The level of risk aversion required to explain this behavior is extreme, and completely inconsistent with lots of other risk-taking behavior by the same sort of subjects.Expand full comment
 If wealth is logarithmic, shouldn't the wealthier have disdained gambling since the gain is that much less utility for them? Yet:> Offers increase significantly with income.More evidence that the rich are able to be less risk averse...Expand full comment
 Addendum: the utility function must be asymptotic, not just non-linear, since the expected payoff is infinite.Expand full comment
 What would you pay for a lottery ticket with an expected value of infinity, even if the variance is huge?Really should have included the link to the modern English explanation: http://en.wikipedia.org/wik...Expand full comment
 Robin, this problem is well known. What is at work here is logarithmic (or some other, non-linear) utility function. From the base case, large loss (initial payment) has higher absolute utility than large gain (total eventual pay-off) not because of loss aversion, but because of non-linear utility function.Expand full comment
 The paper appears to be arguing that the effect can be explained by neglect of small probabilities and by diminishing marginal utility of money. What there is making you say otherwise?Expand full comment
 This isn't explained very clearly, but if I understand it right the payoff is rather obviously linear in cutoff (series length). Could none of the subjects do induction?Expand full comment