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[20200519_114228 UTC: Updated to remove possible loss as my perceived implication of the original question.--martyb]
If you were given $1,000 to play a game, would you accept a 50 percent chance to double your money or a 100 percent guarantee of gaining an additional $500?
Implied in the question was that a 50% chance to double the $1,000 was also a 50% chance to lose all of the $1,000. Put that way, I'd take the 100% guarantee of gaining $500 more. Hmm. But why did I make that choice? What if I started with just $10? Or even $1? Would I choose differently? What if I started with $100,000 or even $1,000,000? Then what would my choice be — and why?
That opening question was one of 17 hypotheticals posed when attempting to replicate 1979 foundational research on loss aversion and prospect theory.
Global Study Confirms Influential Theory Behind Loss Aversion:
A new global study offers a powerful confirmation of one of the most influential frameworks in all of behavioral sciences and behavioral economics: prospect theory, which when introduced in 1979 led to a sea change in understanding the irrational and paradoxical ways individuals make decisions and interpret risk with major impacts for science, policy, and industry. Led by a Columbia University Mailman School of Public Health researcher, the new study in 19 countries and 13 languages replicates the original study that provided the empirical basis for prospect theory. Results appear in Nature Human Behaviour.
Developed by Nobel Prize winner Daniel Kahneman and Amos Tversky, prospect theory has been called the most influential theoretical framework in all of the social sciences and popularized the concept of loss aversion, which says that people prefer small guaranteed outcomes over larger risky outcomes. The 1979 paper that launched the theory is today the most cited paper in economics and is among the most cited in psychological science.
The new study led by Kai Ruggeri, PhD, assistant professor of health policy and management, is a robust test of prospect theory at a scale commensurate with its impact—and the first to test the theory in so many countries, languages, currencies, and to focus on the generalizability of the theory. Ruggeri and colleagues used nearly identical methods to those in the original study, modifying them only to make currency values relevant for a 2019 sample within each country. [...] In all, 4,098 respondents who completed all the questions were included in the final analysis.
Results of 1979 study—now confirmed in the new global study—gave rise to prospect theory and upended orthodoxies around rational choices. Among the original study's findings: people tend to be risk-seeking when maximizing gains, but risk-averse when minimizing losses; our preferences may change depending on how they are rendered sequentially; and we tend to overweight small probabilities.
The researchers found that Kahneman and Tversky's 1979 empirical foundation for proposing prospect theory broadly replicates in all the countries they studied: they report a 90 percent replication in areas directly testing the theoretical contrasts at the heart of prospect theory.
Journal Reference:
Kai Ruggeri, Sonia Alí, Mari Louise Berge, et al. Replicating patterns of prospect theory for decision under risk, Nature Human Behaviour (DOI: 10.1038/s41562-020-0886-x)
(Score: 1, Interesting) by Anonymous Coward on Tuesday May 19 2020, @02:13PM (6 children)
I disagree with the conclusion here. I agree that the poor guy is betting because he's desperate. But "Losing that $1 makes no difference" absolutely isn't true. For a poor person, that $1 can mean the difference between whether his kids get to eat dinner that night. The stakes are nowhere near so high if Bill Gates lost a million dollars.
This is why I am vehemently against lotteries, as they are usually structured. They are mainly a tax on the poor, stupid, and mathematically illiterate. Various studies have shown that the poorest segments of the population on average tend to spend around 5-10% of their annual incomes on lottery tickets. Seriously. (A quick search even shows one estimate as high as 13%.) When you're only making $20k and need to feed a couple kids, $2000 is a lot of money to be losing on gambling and could make a huge difference in the life of your family.
Probably true, especially given that he gives away so much to charitable causes. In fact, there's a push in some places to replace lotteries with actual savings plans of a sort. If states really wanted to support poor people rather than levying a de facto tax on the stupid, they'd set up savings account lotteries, where you put money in an account. Every month (or even every week, if you get enough participation), the bank pools the interest from everyone and gives out some awards. The winnings aren't that big, but most of the poor folks aren't always betting on big Powerball jackpots -- they spend a lot more money on scratch tickets that could net them $100 here or there. Make them save in accounts and let them have a chance at winning that $100 while keeping their money. Literally, everybody wins.
Unfortunately, these sorts of interest lotteries are not legal in most states, as they frequently conflict with gambling laws. So people play the lottery instead, and those $1 or $5 expenses for a ticket add up and decrease their quality of life significantly.
(Score: 0) by Anonymous Coward on Tuesday May 19 2020, @02:17PM
Oh, forgot to mention who was driving the initiative to try to set up those savings lotteries in countries around the world. Guess what -- Bill Gates invested $500 million in that idea [gatesfoundation.org]. That was a decade ago, so I'm not sure how that venture turned out. (I need to read up on it more.) Regardless, that's a $500 million gamble I can get behind...
(Score: 1, Insightful) by Anonymous Coward on Tuesday May 19 2020, @03:36PM
That's not how poor think. There is a reason why many destitute remain so and it has nothing to do with having or not having money. It all comes down to poor decisions.
OP was right. $1 would make little difference and betting on a 500x payoff would be worth it, especially if that $1 was "free". Now, if that $1 comes out of their usual budget, the game is different.
That I would believe.
(Score: 0) by Anonymous Coward on Tuesday May 19 2020, @06:34PM (3 children)
You can't even buy a pack of gum for $1.
(Score: 1) by khallow on Tuesday May 19 2020, @09:58PM (2 children)
(Score: 0) by Anonymous Coward on Tuesday May 19 2020, @10:08PM (1 child)
Not what I was responding to. Try again.
(Score: 1) by khallow on Wednesday May 20 2020, @02:24AM
$2000 != $1. You can buy a lot of gum for $2000.