if we didn’t also see people in surveys saying they would rather take $1000 than a 15% chance of $1M, or $100 now rather than $140 a year later, i.e. utterances that are clearly mistakes.
I agree there are some objectively stupid answers that have been given to surveys, but I’m surprised these were the best examples you could come up with.
Taking $1000 over a 15% chance of $1M can follow from risk aversion which can follow from diminishing marginal utility of money. And let’s face it—money does have diminishing marginal utility.
Wanting $100 now rather than $140 a year later can follow from the time value of money. You could invest the money, either financially or otherwise. Also, even though it’s a hypothetical, people may imagine in the real scenario that they are less likely to get something promised in a year’s time and therefore that they should accept what is really a similar-ish pot of money now.
They’re wildly quantitatively off. Straight 40% returns are way beyond equities, let alone the risk-free rate. And it’s inconsistent with all sorts of normal planning, e.g. it would be against any savings in available investments, much concern for long-term health, building a house, not borrowing everything you could on credit cards, etc.
Similarly the risk aversion for rejecting a 15% of $1M for $1000 would require a bizarre situation (like if you needed just $500 more to avoid short term death), and would prevent dealing with normal uncertainty integral to life, like going on dates with new people, trying to sell products to multiple customers with occasional big hits, etc.
This page says: “The APRs for unsecured credit cards designed for consumers with bad credit are typically in the range of about 25% to 36%.” That’s not too far from 40%. If you have almost no money and would otherwise need such a loan, taking $100 now may be reasonable.
There are claims that “Some 56% of Americans are unable to cover an unexpected $1,000 bill with savings”, which suggests that a lot of people are indeed pretty close to financial emergency, though I don’t know how true that is. Most people don’t have many non-401k investments, and they roughly live paycheck to paycheck.
I also think people aren’t pure money maximizers. They respond differently in different situations based on social norms and how things are perceived. If you get $100 that seems like a random bonus, it’s socially acceptable to just take it now rather than waiting for $140 next year. But it doesn’t look good to take out big credit-card loans that you’ll have trouble repaying. It’s normal to contribute to a retirement account. And so on. People may value being normal and not just how much money they actually have.
That said, most people probably don’t think through these issues at all and do what’s normal on autopilot. So I agree that the most likely explanation is lack of reflectiveness, which was your original point.
I agree there are some objectively stupid answers that have been given to surveys, but I’m surprised these were the best examples you could come up with.
Taking $1000 over a 15% chance of $1M can follow from risk aversion which can follow from diminishing marginal utility of money. And let’s face it—money does have diminishing marginal utility.
Wanting $100 now rather than $140 a year later can follow from the time value of money. You could invest the money, either financially or otherwise. Also, even though it’s a hypothetical, people may imagine in the real scenario that they are less likely to get something promised in a year’s time and therefore that they should accept what is really a similar-ish pot of money now.
They’re wildly quantitatively off. Straight 40% returns are way beyond equities, let alone the risk-free rate. And it’s inconsistent with all sorts of normal planning, e.g. it would be against any savings in available investments, much concern for long-term health, building a house, not borrowing everything you could on credit cards, etc.
Similarly the risk aversion for rejecting a 15% of $1M for $1000 would require a bizarre situation (like if you needed just $500 more to avoid short term death), and would prevent dealing with normal uncertainty integral to life, like going on dates with new people, trying to sell products to multiple customers with occasional big hits, etc.
This page says: “The APRs for unsecured credit cards designed for consumers with bad credit are typically in the range of about 25% to 36%.” That’s not too far from 40%. If you have almost no money and would otherwise need such a loan, taking $100 now may be reasonable.
There are claims that “Some 56% of Americans are unable to cover an unexpected $1,000 bill with savings”, which suggests that a lot of people are indeed pretty close to financial emergency, though I don’t know how true that is. Most people don’t have many non-401k investments, and they roughly live paycheck to paycheck.
I also think people aren’t pure money maximizers. They respond differently in different situations based on social norms and how things are perceived. If you get $100 that seems like a random bonus, it’s socially acceptable to just take it now rather than waiting for $140 next year. But it doesn’t look good to take out big credit-card loans that you’ll have trouble repaying. It’s normal to contribute to a retirement account. And so on. People may value being normal and not just how much money they actually have.
That said, most people probably don’t think through these issues at all and do what’s normal on autopilot. So I agree that the most likely explanation is lack of reflectiveness, which was your original point.