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steven0461 comments on Rational Romantic Relationships, Part 1: Relationship Styles and Attraction Basics - Less Wrong
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Comments (1529)
Obviously, I agree. But let me ask: for what values of X would you choose X$ with 15% chance instead of 1,000,000,000$ with 100% chance?
A quite extreme, but still somewhat defensible theoretical assumption is that utility is logarithmic in money. I once heard Bernoulli already worked with this assumption, many hundred years before Neumann-Morgenstern, and it is probably not so silly to assume this near the power-law tail of the wealth distribution. Not that I think it means anything, but from this admittedly extreme starting point, we get that lg(500) = 2.7 is three times as useful as 0.15*lg(1000000) = 0.9.
That assumes someone who initially has $1, and in that case it's certainly true. If on the other hand you initially have, say, $10k...
log(10.5k) - log(10k) ≈ 0.02
0.15 * (log(1.01M) - log(10k)) ≈ 0.3
The crossover point based on this system is $191. Less than that, and you do better with $500. More than that, and you'd try for the million.
That's not quite right in practice either. Even if you took all my money, I'd still take the 15% chance at $1M and maybe sell a 15% chance of $5k for $500.
Or if that is somehow not allowed, then I'd run into a bit of debt until my next pay check. Even if I really was spending all the money I make and averaging $0, $500 is a mere blip in the noise, not a factor of infinity more money.
It makes more sense to look at the total money in over whatever time scale you plan for.
Yeah, the prospect of other incomes makes a big difference. I neglected to include a requirement that the initial amount, whichever value it takes, is as much as you can come up with before you'll be needing money again.
The present value of my expected future income stream from normal labor, plus my current estimated net worth is what I use when I do these calculations for myself as a business owner considering highly risky investments.
For most people with decent social capital (almost anyone middle class in a rich country), the minimum base number in typical situations should be something >200kUS$ even for those near bankruptcy.
Obviously, this does not cover non-typical situations involving extremely important time-sensitive opportunities requiring more cash than you can raise on short notice (such as the classic life-saving medical treatment required).
Very true, thanks, I missed that. Obviously I am not an economist. Maybe Eliezer has only ever asked the question from people having less than 191 dollars.
Many people are in debt. If you are, then your net worth is less than $191.
Why would people downvote this? Isn't it both correct and obvious? It also has fairly significant implication as to the extent of the applicability of the simplified model.
It depends on what is meant by "debt" and "net value", and as those words are usually used, it is false.
If I borrow money to buy a house, the house being security for the loan, then I am "in debt" by the ordinary use of those words -- I owe money to someone -- yet if my net worth includes the house, it should still be positive (if the lender was prudent). If I borrow money, secured only against my expectation of future income, then again assuming a prudent lender, the present expected value of that future income will exceed the value of the loan. In that case, I am "in debt", and my net worth will be positive or negative depending on whether expected future income is counted or not.
The more usual word for someone whose net worth is negative, measured by the whole of their debts and assets, is "bankrupt".
To be precise, it's "insolvent." "Bankrupt" means that a particular kind of legal decision has been made about how the assets and liabilities of the insolvent party will be handled.
Also, there's the issue of one of the more spectacular and shameless rhetorical scams of the modern age, in which certain kinds of insolvency get to be described as "illiquidity," whereupon such insolvent parties get to claim a blank check on the rest of us to fix their problem.
To be more precise it is "balance sheet insolvency". "Insolvent" also commonly refers to the inability to pay debts when they fall due ("cash flow insolvency').
Grrr. Yes. I am not a fan! I'd be even more averse to the idea when the blank check was coming from me.
Frankly, I think this "cash flow insolvency" stuff is already in the territory of self-serving obscurantism. If you are balance-sheet solvent, you can always pay debts when they fall due by selling your assets or borrowing money against them. I don't see any good reason why such a simple, clear-cut, and bullshit-free notion as "insolvency" should be complicated and obscured this way.
(Of course, here I assume that the goal is to arrive at an accurate understanding of reality, not to master the present language of finance and various related areas of economics, which has a lot of such self-serving obscurantism built in, often quite intentionally. I certainly agree that if one wants to speak this language like an insider, one should be careful to make such distinctions.)
I'm with you on keeping things simple and free of bullshit but I've got to say in this case it is the cash flow insolvency that is the core of the matter. Insolvency, if it is to be described in a simple one liner, is "is the inability of a person - an individual or a corporation - to pay all their debts as and when they fall due."
Having negative net worth just isn't a big deal so long as you can keep paying the payments on your loans, keep buying the stuff you need to run your business and keep paying the employees. In fact large business often merrily operate that way and everybody is happy. It becomes a problem when they can't make the payments they are obliged to make - then they may be forced into liquidation (or bankruptcy depending on the naming convention in the jurisdiction.)
That's not the word either. Obviously simple 'debt' isn't the word: someone with a million dollars in cash who owes his mate ten bucks for the meal the other night. But 'bankrupt' means a different thing again. If you have a $1m mortgage on a house and the property prices have fallen then the value of your assets may well have fallen below that needed to cover your debt but you still aren't bankrupt. At least, not yet and not while you can keep up the payments. Unless your lawyers and accountants recommend it as an option.
I would have guessed the word for what Hugh was referring to would be "net debt" but that is a bit off too (since it doesn't take into account long term assets, just liquid assets). Just plain "deficit net worth" is the simplest description I know of but it seems to be something that deserves a word of its own. Anyone know of one?
It is slang but the convention is "underwater".
Ahh, thanks.
The math works out that he's in contact with people with more than $191 - and that makes sense.
I meant the "random women" he was talking about.