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December 24, 2008

Comments

I think that a proper explanation of why long-shots are overplayed should also explain why people play the lottery at all. This means that framing it as a problem of overestimating odds is probably a false start. People know the lottery odds, and still play.

More likely, we misunderstand their utility functions, and they don't map returns linearly into utility.

For example: If instead of thinking about wealth on a continuum of net worth, you class people into "poor" and "rich"; and you are "poor"; then playing the lottery has no downside. It can move you from "poor" to "rich", or from "poor" to "poor".

Philip: the linked paper takes into account what you discuss, viz that utility functions are not linear in money.

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