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TheOtherDave comments on When is it ever rational to enter a sweepstakes where you may have a 1/10,000 chance of winning? - Less Wrong Discussion
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Comments (15)
The problem with generalizing it is that the value of money isn't constant. I would much rather have a million dollars free and clear than a 1/10,000 chance at ten billion dollars.
The technical term that behavior is risk aversion: http://en.wikipedia.org/wiki/Risk_aversion
Furthermore, the behavior you are describing can be modeled with Utility Theory: http://en.wikipedia.org/wiki/Utility
Utility theory explains many human quirks, such as loss aversion: http://en.wikipedia.org/wiki/Loss_aversion
It also explains why we're willing to pay for insurance, when often times insurance is more expensive than they payouts we receive.
*edited to a more neutral tone
Money is not linear in utility. Even granting that risk-neutrality in utility is the only rational approach, risk-neutrality in money does not follow.
Indeed, you are correct.
In my finance education, professors always argued that your money curve should be as close to 1:1 with your utility curve as possible. Granted, that's a dubious setting. Probably correct for money managers, but not for humans in daily life.
I would not call what utility theory explains in this case a quirk. Ten billion dollars are not actually ten thousand times more useful to me than a million dollars, and as a rational person I should presumably care about utility more than dollars.