Re: Libertarian cartoons

On Aug 24, 8:17 pm, "aaron" <aa...@xxxxxxxxx> wrote:

Another was: Assume a experimenter wants to pay you to take part in an
experiment. the catch is there is a small 1 in 1000 chance of you dying in
the experiment. How much would you demand to incur that 1/1000 risk?

Now assume I come to you and offer to remove a 1/1000 risk of you being
killed. How much would you pay to for that?

An economically rational person would demand the same amount for either.
But people do not. People demand much more to incur the risk than to
remove the same level of risk.
Nope.

Yup.

 Or at least only if you *assume* that utility is strictly
linear in risk.

Utility is the same. It is the same risk.



No, it is NOT the same risk. One is A+d, the other is A-d. They
aren't the same. For instance, say utility is (A + d) squared. If A
is 10 and d is one, that is 10+1 = 11^2 = 121 v 10-1 = 9^2 = 81. +21
v -19.





But if it were no one would either gamble or buy
insurance.

?? I don't follow your logic.



Both insurance and gambling are dependent on people have utility
responses to risk that are *non* linear, while your little example
presumes it is linear. If their risk assessment were linear people
wouldn't do either. Gambling is someone willing to pay $1 for an
expected return of 95 cents. That makes sense if the utility from
$1.90 is greater than double the utility from $1. (and no law says
they have to be the same, people frequently derive pleasure from one
ice cream cone every week but wouldn't buy 52 once a year).

Insurance is the flipside. Instead of people paying to increase their
risk, they pay to reduce it. In both cases the expected return in
cash terms is negative. Or, put another way, they are willing to pay
for the service of having their risk changed. A person with linear
risk assessment would be indifferent between having $1 or spending $1
for a 1 in 1000 of winning $1000. But trade happens when it makes
people better off. They don't trade to be left where they are.

Now take risk of death. A job may pay a $10,000 wage premium for a
certain risk of death and get people willing to work it. But do you
think someone willing to accept $10,000 for a 1 in 1000 risk of death
would let you kill him with certainty in return for a payment of
$10,000,000?




They do, so it obviously isn't.
Or another: Assuming an economically rational person they would be
happier
with a $1000 bonus than a $500 bonus.

But a person who receives a $500 bonus when he knows his co-workers got a
$300 bonus will be more satisfied than the same person who received $1000
bonus but knew his co-workers received a $1200 bonus.

So there is a source of utility in the system other than money.  This
is not a revelation, Sherlock...

It seems to be to you as you have seem to have been arguing that all people
always act economically rationally.


Yes, they do. They seek to maximize their utility rationally. Money
is not the only source of utility. Indeed, in many ways it is not
even *a* source of utility. What it is valued for is what it can be
traded for, not for itself. If you think otherwise, I can sell you
trillions of units of currency from whatever country is undergoing the
worst hyper inflation currently...
.

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