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DanielLC comments on Prospect Theory: A Framework for Understanding Cognitive Biases - Less Wrong

66 Post author: Yvain 10 July 2011 05:20AM

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Comment author: DanielLC 15 February 2012 06:23:05PM 1 point [-]

Utility is generally accepted to be differentiable in money, which means that it's approximately linear in amounts that are insignificant over your lifetime earnings. If you use a non-linear utility to explain risk aversion for a small amount of money, and extend this until you get large amounts of money, it results in absurdly huge utility falloff. I remember someone posted an article on this. I can't seem to find it at the moment.

Comment author: roystgnr 15 February 2012 07:15:59PM 1 point [-]

Unless you have a good estimate of your future earnings and can borrow up to that at low interest rates, I think "amounts that are insignificant compared to your current liquidity" might be a slightly more rational metric. Note also that any explanation of human risk aversion (as opposed to rational risk aversion) is trying to explain behaviors that evolved during a time when "borrowing at low interest rates" wasn't really an option. If a failed risk means you starve to death next year, it doesn't matter how copious a quantity of food you otherwise would have acquired in subsequent years.

Comment author: [deleted] 15 February 2012 07:40:39PM 0 points [-]
Comment author: taw 15 February 2012 07:15:28PM 0 points [-]