Poor People Should Probably Gamble More

http://ewjordan.blogspot.com/2010/10/poor-people-should-probably-gamble-more.html

by ewjordan • 16 years ago

50 54 16 years ago

ewjordan.blogspot.com

nhashem• 16 years ago

Sorry, I'm not buying this because utility can't be measured in pure dollars. If Mary does nothing, she does get socked with $100 and loses her license, but she still keeps the $130 that she uses for groceries et al. If she gambles and loses, then she's basically dead broke and can't even buy food, and if we're assuming she has no outside sources for help, then she is supposedly going to starve to death. That has a lot more (dis)utility than just losing $130.

If she just gets socked with the fine and loses her license, she can still make other gambles that have a lot better expected value as overall utility, not just money. She can make the gamble of driving without a license, as the risk of being caught by the police is a lot less than losing everything by betting on black. She can use the $130 to buy a bicycle or a moped, and maybe that's enough transportation to get by for now. And so forth.

The author has a good point in that the expected value in a gamble is often a better choice than the status quo, but reducing everything to dollars and coming up with the conclusion that "if you're screwed, put everything on black," is a fallacy.

ewjordan7• 16 years ago

If she gambles and loses, then she's basically dead broke and can't even buy food, and if we're assuming she has no outside sources for help, then she is supposedly going to starve to death.

Yes, this is a very good point, perhaps the way I should have phrased the example was that she had $130 left in the bank after obtaining the necessities of life, to remove that concern. In that case, I think the logic goes through a bit better.

She can make the gamble of driving without a license, as the risk of being caught by the police is a lot less than losing everything by betting on black.

In my example, that's exactly what I did (I drove as little as possible, but on occasion I had no choice), and I did, in fact, get away with it long enough to get my license back (it's worth noting that had I not gotten away with it, getting my license back would have been a much more troublesome process). But be aware, I was pretty lucky - if your license is taken away, your plate will get flagged if the car is registered in your name, and you'll absolutely get pulled over if a police officer sees you driving and has nothing better to do. My girlfriend was pulled over several times while driving my car during that period, and then immediately let go when they realized it wasn't me behind the wheel.

reducing everything to dollars and coming up with the conclusion that "if you're screwed, put everything on black," is a fallacy

Indeed, it's not always the right solution - but it's also wrong to assume that just because the odds are against you in a bet, you shouldn't take the bet, if the other option is to do nothing, especially if doing nothing leaves you screwed anyways.

hitonagashi• 16 years ago

The problem for me is that if you are in that situation, it may work for a one off...but if you are poor, that isn't going to be the only occasion a situation like that comes up. If your solution is gambling to resolve problems, your luck will eventually run out and leave you in an even bigger mess than when you started.

mattmaroon11• 16 years ago

I sure hope nobody reads this and is fooled by it. It's terrible, terrible advice for three reasons.

1. Money has a declining marginal utility. Winning that $130 isn't nearly as positive as losing it would have been negative. The author neglects to mention what happens the other 53% of the time when someone with mounting bills loses the last money they had. Debt spiral is usually the result. Even if the odds were 50/50, or in fact even if they were slightly favorable but it were a one-time deal, it would be better not to gamble. You should really only gamble in situations where the expectation is more than enough to offset the declining marginal utility, or is repeatable enough to accomplish that.

#2. If someone has the discipline to go into a casino, double their money, and leave without gambling further, then they probably had the discipline to avoid this situation in the first place. Casinos make billions of dollars because most people can't do this.

#3. It's fairly rare in the real world that there isn't some option better than gambling. Even a payday loan place probably gives you a higher EV than a roulette wheel. Borrowing from a credit card probably does as well. Do either to bridge the gap while looking for a second job. Also driving with a suspended license is an option.

#3.5 (bonus reason): You're much better off making a don't pass bet at a craps table while you're there. I think that's the best bet you'll find in a casino that doesn't require skill. (There are better, some that are even positive expectation, but I'm assuming our person isn't a professional video poker player.)

gojomo4• 16 years ago

All that you say is practical and true but it seems in this contrived example, the imminent deadline with a disproportionate-to-the-time-value-of-money late fee means that liquidity now, in the winning scenario, has an extra utility -- as if it had increasing marginal utility.

mattmaroon11• 16 years ago

It doesn't though, because you're not considering the rest of life. Whether or not this person pays the BMV, they still have to buy groceries, pay off credit cards. That $130 is not useless at all.

The most likely result of gambling is that they will still have to pay the BMV bill plus now have to recoup $130 (which is hard for them to come by) to pay other bills.

larrykubin• 16 years ago

Note: when you make a don't pass bet, not only are the odds still slightly against you, at least 10 other people at the table will hate you too :)

mattmaroon11• 16 years ago

That's the most fun part.

JimboOmega• 16 years ago

As for 1, the whole article is arguing a case where that is not true. They are illustrating a case where Mary's $130 is not worth much of anything: it doesn't pay half of her $250 liability and get her out of half of the downside. It's useless. But doubled, it has some utility.

Granted it's an oversimplification, because that $130 could be used for something, and yes, #2 and #3 are probably better. (Though with fees and multiple rollovers, the payday loan could be ouchy).

Still - declining marginal utility is not always the case. There are plenty of situations like this one, (especially for a corporation) where having half of the money necessary gets you nothing.

Of course, there are also almost always better ways of securing that financing, unless you're the only person that perceives the odds that way.

Here's an interesting example in my life - if I get a windfall, the marginal value starts off low (I don't change my lifestyle), rises somewhat (it becomes enough for me to take a breather from my job and spend more time working on my startup), and eventually declines as I no longer need more to work.

Or in other words, I can't retire because I got $10k. Not useful. But if I can make that $50k, I can survive for a year+ and try to launch a company - that's useful. The value of that $50k is more than 5 times as much as the $10k. (Though the $10k does get me that much closer to having enough...)

mattmaroon11• 16 years ago

It's not useless. It still pays for groceries, gas, etc. It's still $130 less she needs to put on credit cards for whatever.

In the real world, where you're never faced with two simple options like retire on $10k or start a business for $50k, money's marginal utility is effectively always diminishing.

ewjordan7• 16 years ago

1. Money has a declining marginal utility. Winning that $130 isn't nearly as positive as losing it would have been negative.

I question this because you're already in the red: do nothing, and you'll be left with $130 in the bank but $250+$100=$350 in liabilities that eventually have to be paid, so you're at -$220 by default (even if you've still got $130 in your pocket, that's not really your money; as I commented elsewhere, I probably should have set up the example so that Mary had already purchased food for the week, to avoid questions of starvation).

When you're starting in negative territory the usual rules about marginal utility of money don't necessarily apply, I'd actually argue that there might be more utility gained when you go from -$50 to +$50 than there is going from -$150 to -$50 because of the debt spiral effects that you mention.

As for your other points, I agree, there are issues with the false dichotomy that I've set up, ones that I expected to be called out on. Perhaps I should have worked out a better example where there were fewer options available, c'est la vie.

mattmaroon11• 16 years ago

No, I'm pretty sure declining marginal utility applies more when you're in debt, not less, because interest rates on loans compound. Someone who owes credit cards $150 is going to be FAR more in debt, as a percentage of earnings, after a year than someone who owes $50.

coryl• 16 years ago

#3.5) or decent Texas Holdem player. I won a couple hundred bucks in a 10 man tourney in Vegas. Final showdown hand: Ad, 7d. His hand, As, Qc. I pushed all in, he called.

Diamond flush for the win! It's better to be lucky than skilled :D

corin_• 16 years ago

Is that a safer bet than blackjack, or are you defining blackjack as "a game of skill"?

(I know it's a smaller house edge than roulette by some way, but not too familiar with craps)

mattmaroon11• 16 years ago

Don't pass is a much safer bet if your goal is to bet once and double your money. Blackjack can have a positive expectation (craps cannot, absent some unusual promotion) but that requires much skill. Even with knowledge of basic strategy though, which can get the house edge very low (assuming rules that favor players, like what you'd find on the Vegas Strip) it's not a good all-in wager. A significant amount of the EV from blackjack comes from doubling down and splitting, which require you to put up extra money, so if you're playing it all-in, you're much more likely to go bust than at roulette or either line bet in craps.

Also some of the EV comes from blackjacks (typically paying 3:2) so there is some chance you'll end up with more money than you need. You could walk out with $325. Again since marginal utility is diminishing the extra risk is bad.

noonespecial2• 16 years ago

The catch here that the author was trying to tease out is that marginal utility is not always a smooth curve. Sometimes it is a step function, which changes the rules around the step.

Tax brackets are another classic example. Sometimes you get much more by being paid a little less.

Edit: The tax thing was a brain glitch and not true IRL. Check Matt's comment below. There may be true life examples where you come out ahead but they are likely to be scholarships or insurance policies or something with similar hard cutoffs that form step functions.

mattmaroon11• 16 years ago

No you don't. Earning more never causes you to take hom eless after taxes (at least in any country I know of). That's a common fallacy about them amongst people who don't understand the tax code.

Tax rates are marginal. So for instance if the tax rate was 20% up to $100k, then 30% afterward, you'd pay 20% on your first $100k, then 30% from $100,001 and up.

blasdel• 16 years ago

Tax brackets do not work that way! http://www.youtube.com/watch?v=ZQg8JKo_3ZQ

You only pay the higher rate for income within that bracket.

Making an extra dollar pushing your taxable income to $34,001 as a single American in 2010 does not raise your Federal taxes from $5100.00 to $8500.25 by naïvely applying the higher rate — it actually raises your taxes by 25¢ from $4681.10 to $4681.35.

illamint• 16 years ago

And for God's sake, man, pay your tickets before they're overdue, a few hundred bucks is nothing compared to the pain of trying to get just about anything done at the Connecticut Department of Motor Vehicles!

It's true: I just moved to CT and had to deal with transferring a car title, registration and license from out of state and it was a nightmare. Definitely would've rather spent the 8 hours and ~$350 at a casino, of course.

krschultz• 16 years ago

+1 because I just did the same thing. CT DMV has to be the worst in the country.

jfager2• 16 years ago

Or: go to the courthouse to get on a payment plan or ask the judge to waive the ticket or let you perform community service. It's not like you're the only person ever who hasn't been able to pay a ticket, that scenario gets handled all the time with zero drama.

patio11• 16 years ago

The notion that "this is probably negotiable" is one of the things that persistently separates rich people from poor people in my experience. (That is partially a knowledge thing, partially a culture thing, and at least partially a "people tolerate rich people having a cavalier disregard for The Rules a lot more than they tolerate poor people in the same situation" thing.)

jfager2• 16 years ago

In my experience, the notion that "I should go to the casino to try to get out of this" is one of those things, as well. They're both reflections of the same underlying issue, the division between "I'm helpless" vs. "I can do something". It's a little mind-bending to read a post that tries to frame gambling as something someone in the latter category would do.

ewjordan7• 16 years ago

The notion that "this is probably negotiable" is one of the things that persistently separates rich people from poor people in my experience.

When I landed myself in this situation, that was exactly the problem: I felt like the Big Bad Court System would never cut a stupid kid like me any slack, and it just never occurred to me that I should talk to them and see what could be done about it. After trying unsuccessfully to deal reasonably with the DMV on the issue, I sort of assumed every aspect of the government was always out to screw me over in any way possible.

Live and learn, I suppose.

mattmaroon11• 16 years ago

I'm pretty sure you can get out of many fines completely on grounds of indigency.

gojomo4• 16 years ago

I clicked through expecting to be disappointed... but by golly, there's something to this. An imminent, disproportionate late-fee can make a less-than-even chance of instant liquidity more valuable than a more-than-even chance of larger loss.

Of course, assuming any reasonable credit is available at all, and that the person is not in permanent deficit unable to eventually pay back a loan, would give rise to a dominant option C, where enough is borrowed to avoid the penalty. But maybe this same effect is what makes 'payday' loans at astronomical effective rates attractive to some people.

Is there some other 'guardian angel' business model possible from this effect -- protecting the liquidity-challenged from disproportionate late fees, via an automatic loan of just-enough to save the fee, splitting the savings with the affected person?

As in: seconds before BofA or some other institution is about to pillage someone for $30, the 'angel' swoops in with a just-in-time loan, charging the person (in fees and interest) any amount less than $30 -- and lower with more competition.

jrockway2• 16 years ago

It's called a credit card or savings account.

If you have a credit card, you can't overdraw it. Or you can link your checking account to it, avoiding the "we're loaning you money even though you didn't ask for it" fee. Or you can have a savings account, and dip into that when your checking account runs out of money. Or you can just not run out of money.

I got hit with an overdraft fee back when I was in college even though I explicitly opted out. I didn't make that mistake again. I stopped using a debit card and started using a credit card again... and now I even get 1.5% cash back. (If this happened to me now, I would have just filed a complaint with the state's attorneys general office. Customer service doesn't want to help? Enjoy the fine and new regulations.)

gojomo4• 16 years ago

Yes -- that's what someone who's on the ball does, using a short-term/reasonably-priced source of extra funds to avoid late fees.

The theory of the 'guardian angel' service is that it handles things even when you forget. It presupposes that there's some way to give the service total visibility into your imminent payment deadlines -- of course right now that doesn't exist, and the businesses that rely on late fees for their margin may not want it to.

But this might be an appropriate area for an industry consortium or even regulation to create a clearinghouse. If you're about to fine someone $X for an amount due up to $Y, you have to broadcast it on some confidential national clearinghouse an hour before assessment, allowing a contracted representative of the target to settle it on their behalf. If you do this, your fine is considered reasonable and customary; if you don't, it's presumed to be trickery and held to a higher standard.

I agree it's farfetched. But when we're talking contrived scenarios where people living hand-to-mouth should play roulette, the imagination wanders!

sliverstorm• 16 years ago

> In the end, though, I did nothing, my license was revoked, and I had to live without one until I was able to come up with the extra cash that it took get it back

Maybe that was the best solution? Having to live without a privilege such as your licence seems like one of the best ways to teach you not to let your registration expire next time. Stay on top of things, and don't let the first late fees happen in the first place. If you STILL don't have enough money, you're living beyond your means, plain and simple.

seles• 16 years ago

"Let's assume for the moment that Mary has no safety net; there are no friends she can ask to float her a loan, no family members that she can reach out to, etc."

But this is almost always a false assumption. It would be better to borrow money to pay the fee in time. Can anyone think of a case where it actually would be better to gamble (at expected loss) than borrow money?

DrStalker2• 16 years ago

Maybe her friends are sick of watching her gamble her last few dollars away whenever there is an emergency.

javanix• 16 years ago

And uneducated people shouldn't read this at all.

rkosai• 16 years ago

What about the case for a startup? Say, you raise $500k but you "know" (for the sake of argument) you need a million to make the thing work.

No gamble: 0% chance of success * 53%

Put it all on black: non-zero chance of success * 47%

I don't imagine this would go over very well with investors, though.

skowmunk• 16 years ago

Dunno abt poor people gambling more, but they sure can get educated more - so that they can at least calculate their odds better.

Dn_Ab3• 16 years ago

I do not think the reasoning in this piece is solid. Firstly the concept of expected value only make sense over repeated trials of the same experiment and using it here on a one off is a misapplication. Unless the person is expecting many such tickets. At which point the combination of the person's stupidity and statistical variance will have them broke a lot quicker. The expected value is no more meaningful as a dollar amount as 2.5 is for average number of kids to a family.

The other portion is the fact that the $250 is a sunk cost. Future decisions should be independent of that money lost. Rationalizing gambling using cost relativity since gambling on an already expensive bill "will save you money" is not logical. It won't save you money unless you keep doing stupid things at which point you are already losing alot of money - its on average meaning repeated trials. Simply irresponsible. I'm either gonna win $130 with 47% chance or lose $130 with 53% chance. My $250 bill is sunk and completely independent of this decision and outcome. Otherwise any time I have an expensive bill to pay and will be left with only about $130 why not gamble it save the amount I need to pay in the long run. This is the start of a gambling problem.

kscaldef• 16 years ago

The $250 is a sunk cost, but the further $100 penalty if you don't pay is not. That's the critical point that you're ignoring.

ewjordan7• 16 years ago

I'm either gonna win $130 with 47% chance or lose $130 with 53% chance. My $250 bill is sunk and completely independent of this decision and outcome. Otherwise any time I have an expensive bill to pay and will be left with only about $130 why not gamble it save the amount I need to pay in the long run. This is the start of a gambling problem.

No, you're missing the point: the $250 is, indeed, a sunk cost. The $100 fee that's going to add on if it's not paid on time, however, is not.

Stripping away all the irrelevant details of the problem, the (completely contrived and artificial, indeed) choice is between:

A) Certainly losing another $100, B) A near 50/50 shot (minus a single-digit house edge) of either winning $130, or losing $230 (lose the $130 bet, plus have to pay the $100 "late fee")

The $250 owed is irrelevant to the problem except to trigger the late fee and set up this payoff structure.

Firstly the concept of expected value only make sense over repeated trials of the same experiment and using it here on a one off is a misapplication.

Whether or not expected value calculations are valid for single shot deals, are you really saying you'd choose option A in this situation, which loses you twice as much as the expected loss in option B?

mattmaroon11• 16 years ago

Actually EV "makes sense" even when applied only once. You should take any positive EV gamble you can at any time you can, and avoid the opposite.

Life is a series of one time decisions. You might not get the same exact gamble again, but you'll get many others, and if you keep taking ones with positive expectation you'll end up ahead in the long run.

Dn_Ab3• 16 years ago

I see. I did miss the part about the $100 late fee. And you know what, I would still take option A because the expected loss is not meaningful to me, I don't intend to have this happen again. For one, I should not have been speeding or whatever and then compounded the problem by ignoring the punishment. I deserve that penalty and gambling it away is missing the point. In fact, I'd rather the money go to the local municipality than some casino's pocket. Or I would take another bet with better odds or payout :)

Then there is the other part.

You can't ignore utility. Heard of loss aversion before? How people prefer more risk when it is supposed to mitigate a loss? This is a textbook example of that psychological fallacy. Am I willing to risk a further $130 to avert my loss? No, not in this situation, considering my actions and the increased utility the money has to me as a poor college student. But phrased this way most people would take the risk!

I look at it this way. I am not willing to take an even odds bet of $130 that a coin will turn up heads, especially when I already owe $250. Are you? Most people are risk averse when the situation is phrased properly. If you are willing to take the bet then you derive less utility from the money and so are not applying the correct mental context of a cash strapped individual. Unless a poor appreciation of money is why this individual is cash strapped in the first place.

And finally, there is the fact that this could breed irresponsibility in many people. They do it once, win and a lesson is not learned. Increased likelihood of repeated behaviour and say the bet is lost the next time we have more money lost than if the bitterness of the fine had been instilled. They would have to do this enough times for the law of large numbers to kick in for them to approach their expected loss. Worse is if this becomes a general philosophy toward bills. Oversimplification of course but the point remains.

araneae• 16 years ago

Tangent:

I always thought state sanctioned lotteries were highly immoral. Sure, they want the tax revenue, but poor people are disproportionately the victims of what feels like fraud. The people believe that have a chance at winning what they most certainly do not.

It's like reverse welfare- taxing the poor and uneducated for the benefit of the masses.

julius_geezer• 16 years ago

It's definitely a regressive tax. Generally it offers worse odds than the numbers guys did back in the day.

One could argue that it's better than legalizing casino gambling and inviting Steve Wynn to come into your state and help write the laws.

ewjordan7• 16 years ago

Tangent:

Not at all. In fact, I wrote this up because of a conversation I had a while back with a man buying a lottery ticket at the gas station. I was talking with him about how bad the odds were, and he fully admitted that he was getting terrible odds on that dollar.

But he figured that on the one in a million chance that he hit the jackpot, even if he only saw a quarter of that amount he could actually get out of debt and start making the power of compound interest work for him instead of against him, and after enough time with that money in the bank, the scales would tip in favor of spending the dollar on the lottery ticket.

Now, I don't think that argument really holds water, and I told him so (for several reasons, even apart from my skepticism that he'd actually put any cash he won into a properly managed account without spending a huge chunk of it first; the odds at the lottery are so hideous and the doubling time for a quarter million that you're also drawing money out of to live off of is very long, so it would be tough to make those numbers work out), but it got me started thinking about whether there might actually be situations where a losing gamble could be worthwhile, depending on the current situation of indebtedness.

DrStalker2• 16 years ago

I like to pickup lotto tickets occasionally; it's basically a small fee to spend the week daydreaming about what you'd do with a sudden influx of money you didn't have to do any work to get. If I win back the cost of the ticket on a minimal prize I consider myself to have won.

Gambling where you get the results quickly (pretty much anything at a casino) has no appeal for me though, I see that as simply destroying money.

mattmaroon11• 16 years ago

This is exactly why the lottery is called a tax on the poor. For one, it's hard to think about expected value when you can't pay your bills.

Also people greatly overestimate their odds of winning big prizes like that. If the odds of winning the lottery were 1 in a million I'd be buying tickets by the truckload.

ojbyrne• 16 years ago

Of course, poor people _do_ gamble more.

lsc• 16 years ago

The problem here, I think, is that the problem as stated only works out if having $0 dollars is no better than having -$200.

I don't think this is the common case, but there are cases where that makes sense, for instance if keeping a license enables you to keep a job that will allow you to easily pay off the debt, or, if you multiplied the numbers by 1000, and assumed the poor person was willing to declare bankruptcy. In that case, you might have a point; Really, I think this is why buying a house at a time of obvious volatility is such a good deal, assuming you have no other assets. If prices go up, you have put 5% down on an asset that is appreciating quickly. In the up market, housing was appreciating at north of 10% a year; that's 10% of the total home value, of which you maybe put down 5%. If prices go down? you walk.

The question, in that case, is how much does declaring bankruptcy cost? I mean, you have the up front lawyer costs... then you have the problems associated with having bad credit. but I can see many cases where taking the gamble would make sense.

Poor People Should Probably Gamble More

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