Rule #1 is: Don't lose money
On blackjack, Warren Buffett, and why a deal may look different depending on where you stand on the space-time continuum
A YouGov survey of nearly 16,000 American adults asked, “If you had a choice between instantly receiving $50,000 or flipping a coin for a 50% chance to win $1 million, which would you pick?” According to the most mathematically rational approach -- the same one used to decide things like the cost of homeowners insurance or which cards to play in blackjack -- it’s a question of expected values: Expected value #1 is a straight $50,000, while expected value #2 is worth 50% of $1,000,000, or $500,000. If faced with a series of repeated choices, the person choosing to maximize the expected value could reasonably be expected to come out ahead.
■ But among the things unaccounted-for in that approach is this: A guaranteed outcome triggers the endowment effect. If one option is literally a sure thing, then the baseline moves -- suddenly, option #1 becomes “Do nothing and you’re happier than you were before you started” and option #2 becomes “Pay $50,000 for a lottery ticket that has a 50% chance of rewarding you $950,000, plus your original deposit.”
■ “Pay $50,000 for a lottery ticket” sounds like a much more aggressive choice. Loss often hurts more than how good it feels to win. Warren Buffett’s heuristic is “Don’t lose money”, and that’s worked out to be terrific advice for those who have followed him for the long run.
■ Thus, even though there are those who would like to over-interpret the results of such a poll, there’s nothing alarming in the results that say 65% of Americans would take the guaranteed money. It may not be the expected-value-maximizing choice, but it makes lots of sense when viewed from the perspective of time after the “guaranteed thing” has in fact paid out. From that angle, it’s hard to see how 25% of adults would agree to pay $50,000 for a lottery ticket.