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  • Risk

    I will propose three scenarios, and would like to see various polytubbies' responses. Note that there is no "right" answer here (though there are sets of answers which appear to be more consistent than others).

    Scenario 1: A man (who can be trusted completely proposes the following game: You will pay him X$. He will flip a fair coin; if it lands heads, he will give you 100$, while if it lands tails, you will get nothing. What is the most you would give him? To be clear, if you were absolutely risk-neutral, you would pay 50$, because 50 = 0.5 * 100.

    Scenario 2: Same scenario, except now the amount at stake is 50 000$. Some of you may be borrowing-constrained, so let's say that whatever you pay and whatever you win will be amortized over 10 years at 6% (compounded monthly). 50k works out to a payout of ~555$ a month over ten years. Thus, if you were risk-neutral you would offer 25k; in this case, if you lost, you would pay him (25/50)*555 = 278$ a month, and if you won he would pay you the same amount. If you were more risk-averse, you might bid 15k; if so, and you lost, you would pay him (15/50) * 550 a month, while if you won he would pay you (35/50) * 550 a month

    Scenario 3: Same setup, except 250k and amortized over 25 years. 250k amortized over 25 years at 6% is ~1610$ a month, so replace the 555 from above with 1610 and the 10 years with 25

    Assume, for the sake of argument, that you would pay no taxes on any winnings from any of these games. A perfectly risk-neutral individual would pay, in order, 50$, 25 000$, 125 000$. What would you pay?
    12-17-10 Mohamed Bouazizi NEVER FORGET
    Stadtluft Macht Frei
    Killing it is the new killing it
    Ultima Ratio Regum

  • #2
    Can't you do your own job without having to come to us for help?
    Speaking of Erith:

    "It's not twinned with anywhere, but it does have a suicide pact with Dagenham" - Linda Smith

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    • #3
      This isn't my job. I operate in the risk-neutral world.

      This is a repeat of a classic behavioral economics experiment.

      I am interested to see the range of responses.
      12-17-10 Mohamed Bouazizi NEVER FORGET
      Stadtluft Macht Frei
      Killing it is the new killing it
      Ultima Ratio Regum

      Comment


      • #4
        I wouldn't pay him anything. He set the parameters, he can live with it.
        Life is not measured by the number of breaths you take, but by the moments that take your breath away.
        "Hating America is something best left to Mobius. He is an expert Yank hater.
        He also hates Texans and Australians, he does diversify." ~ Braindead

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        • #5
          So you would walk away from the opportunity to give a man 1$ for a 50% chance of winning 250 000$?
          12-17-10 Mohamed Bouazizi NEVER FORGET
          Stadtluft Macht Frei
          Killing it is the new killing it
          Ultima Ratio Regum

          Comment


          • #6
            You're the one who gets to set the parameter. I want the highest number you would pay in each of those scenarios.

            You would obviously pay 1$ for each of those games (I hope?). Increase the number from 1 for each of those scenarios until you'd no longer be willing to play.
            12-17-10 Mohamed Bouazizi NEVER FORGET
            Stadtluft Macht Frei
            Killing it is the new killing it
            Ultima Ratio Regum

            Comment


            • #7
              1: probably somewhere between $45 and $50 for scenario 1, particularly if it's over a short timespan

              2 and 3: probably something in the range of 20-30%

              For 2 and 3 I can't give a very good answer, because even though I am not borrowing constrained, I have a strong but difficult-to-quantify preference against drawing on the relevant credit lines.

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              • #8
                a) I have offered you lending terms (6%, compounded monthly) so you don't have to draw on any of your other credit lines
                b) Can you be more precise?
                12-17-10 Mohamed Bouazizi NEVER FORGET
                Stadtluft Macht Frei
                Killing it is the new killing it
                Ultima Ratio Regum

                Comment


                • #9
                  My standard of living is thoroughly insulated from falling below a certain level because of my parents, but I would be very unhappy to actually need that assistance.

                  Presently (as I'm still living at home because any other choice is completely unjustifiable, financially) all money means to me is "how much happiness do I get from having the number in my bank account be this big?" Marginal extra dollars have literally no effect whatsoever on my consumption.

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                  • #10
                    Personally, my answers are:

                    1) Between 49.99 and 50$
                    2) ~24600$
                    3) ~115k
                    12-17-10 Mohamed Bouazizi NEVER FORGET
                    Stadtluft Macht Frei
                    Killing it is the new killing it
                    Ultima Ratio Regum

                    Comment


                    • #11
                      Bidding the full 50% in the third scenario can only cost you ~800$ a month.

                      That would be quite painful, but not ruinous for most people.
                      12-17-10 Mohamed Bouazizi NEVER FORGET
                      Stadtluft Macht Frei
                      Killing it is the new killing it
                      Ultima Ratio Regum

                      Comment


                      • #12
                        I wouldn't finance a bet, zero interest or not. I only bet what I can comfortably lose.
                        Life is not measured by the number of breaths you take, but by the moments that take your breath away.
                        "Hating America is something best left to Mobius. He is an expert Yank hater.
                        He also hates Texans and Australians, he does diversify." ~ Braindead

                        Comment


                        • #13
                          Originally posted by Kuciwalker View Post
                          (as I'm still living at home because any other choice is completely unjustifiable, financially)

                          So much **** talking and I don't live with my parents. Haven't lived with my mother since 16 or so. Nice.
                          "Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
                          "I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi

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                          • #14


                            And what, exactly, have you gained from doing that? I bet it's given you the freedom to bring home plenty of women OH WAIT

                            Meanwhile I'm effectively earning an extra $10k/year tax-free (at least).

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                            • #15
                              Then why aren't you gone?
                              Life is not measured by the number of breaths you take, but by the moments that take your breath away.
                              "Hating America is something best left to Mobius. He is an expert Yank hater.
                              He also hates Texans and Australians, he does diversify." ~ Braindead

                              Comment

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