Okay, I tested this on a couple of uninvolved bystanders and yes, they would take the $500 over the 15% chance of $1m. Guess it’s true. Staggers the mind.
I tried it on two women at work and they both went for the million, one with no hesitation and the other after maybe 10 seconds. Although they both have some background in finance and are probably 1 to 2 standard deviations above average IQ.
As previous comments have said, it would be possible to sell the 15% chance for anything up to $150k. Once people realise that the 15% chance is a liquid asset, I’m sure many will change their mind and take that instead of the $500.
What does this mean? If the 15% chance is made liquid, that removes nearly all of the risk of taking that chance. This leads me to believe that people pick the $500 because they are, quite simply, (extremely) risk-averse. Other explanations (diminishing marginal utility of money, the $1 million actually having negative utility, etc.) are either wrong, or they are not a large factor in the decision-making process.
Note that the standard explanation for risk-aversion just is diminishing marginal utility (where utility is defined in the decision-theoretic sense, rather than the hedonic sense). However, Matt Rabin pretty convincingly demolishes this in his paper Diminishing marginal utility of wealth cannot explain risk aversion.
Okay, I tested this on a couple of uninvolved bystanders and yes, they would take the $500 over the 15% chance of $1m. Guess it’s true. Staggers the mind.
I tried it on two women at work and they both went for the million, one with no hesitation and the other after maybe 10 seconds. Although they both have some background in finance and are probably 1 to 2 standard deviations above average IQ.
That’s not very surprising. You could see if they passed all three questions on the reflection test.
My fiance (who has a more advanced degree than I) thought I was trying to trick her and made me restate the problem several times.
As previous comments have said, it would be possible to sell the 15% chance for anything up to $150k. Once people realise that the 15% chance is a liquid asset, I’m sure many will change their mind and take that instead of the $500.
What does this mean? If the 15% chance is made liquid, that removes nearly all of the risk of taking that chance. This leads me to believe that people pick the $500 because they are, quite simply, (extremely) risk-averse. Other explanations (diminishing marginal utility of money, the $1 million actually having negative utility, etc.) are either wrong, or they are not a large factor in the decision-making process.
Note that the standard explanation for risk-aversion just is diminishing marginal utility (where utility is defined in the decision-theoretic sense, rather than the hedonic sense). However, Matt Rabin pretty convincingly demolishes this in his paper Diminishing marginal utility of wealth cannot explain risk aversion.