
Poor People Should Probably Gamble More - ewjordan
http://ewjordan.blogspot.com/2010/10/poor-people-should-probably-gamble-more.html
======
mattmaroon
I sure hope nobody reads this and is fooled by it. It's terrible, terrible
advice for three reasons.

1\. Money has a declining marginal utility. Winning that $130 isn't nearly as
positive as losing it would have been negative. The author neglects to mention
what happens the other 53% of the time when someone with mounting bills loses
the last money they had. Debt spiral is usually the result. Even if the odds
were 50/50, or in fact even if they were slightly favorable but it were a one-
time deal, it would be better not to gamble. You should really only gamble in
situations where the expectation is more than enough to offset the declining
marginal utility, or is repeatable enough to accomplish that.

#2. If someone has the discipline to go into a casino, double their money, and
leave without gambling further, then they probably had the discipline to avoid
this situation in the first place. Casinos make billions of dollars because
most people can't do this.

#3. It's fairly rare in the real world that there isn't some option better
than gambling. Even a payday loan place probably gives you a higher EV than a
roulette wheel. Borrowing from a credit card probably does as well. Do either
to bridge the gap while looking for a second job. Also driving with a
suspended license is an option.

#3.5 (bonus reason): You're much better off making a don't pass bet at a craps
table while you're there. I think that's the best bet you'll find in a casino
that doesn't require skill. (There are better, some that are even positive
expectation, but I'm assuming our person isn't a professional video poker
player.)

~~~
noonespecial
The catch here that the author was trying to tease out is that marginal
utility is not always a smooth curve. Sometimes it is a step function, which
changes the rules around the step.

Tax brackets are another classic example. Sometimes you get much more by being
paid a little less.

Edit: The tax thing was a brain glitch and _not true_ IRL. Check Matt's
comment below. There may be true life examples where you come out ahead but
they are likely to be scholarships or insurance policies or something with
similar hard cutoffs that form step functions.

~~~
mattmaroon
No you don't. Earning more never causes you to take hom eless after taxes (at
least in any country I know of). That's a common fallacy about them amongst
people who don't understand the tax code.

Tax rates are marginal. So for instance if the tax rate was 20% up to $100k,
then 30% afterward, you'd pay 20% on your first $100k, then 30% from $100,001
and up.

~~~
stoney
Income tax is probably always marginal, but in the UK at least this kind of
thinking does apply to selling houses - when a house is sold in the UK the
buyer must pay "stamp duty", which is a percentage of the value of the house,
with the percentage changing at certain thresholds. For example at £250,000
the stamp duty changes from 1% to 3% - but the percentage applies to the
entire value of the house. So if you sell for 250,000 the buyer pays 250000 *
0.03=£7500, compared to 249999 * 0.01=£2,499.

That introduces some distortions into house pricing, making it very difficult
to sell a house in the £250,000 to £265,000 range - because you are competing
with houses just under the threshold which work out significantly cheaper for
the buyer. As someone selling a house which falls into that price range, you
might be better off asking for slightly less from the sale (versus asking for
just over the threshold and waiting much longer to find a buyer).

------
nhashem
Sorry, I'm not buying this because utility can't be measured in pure dollars.
If Mary does nothing, she does get socked with $100 and loses her license, but
she still keeps the $130 that she uses for groceries et al. If she gambles and
loses, then she's basically dead broke and can't even buy food, and if we're
assuming she has no outside sources for help, then she is supposedly going to
starve to death. That has a lot more (dis)utility than just losing $130.

If she just gets socked with the fine and loses her license, she can still
make other gambles that have a lot better expected value as overall _utility_
, not just money. She can make the gamble of driving without a license, as the
risk of being caught by the police is a lot less than losing everything by
betting on black. She can use the $130 to buy a bicycle or a moped, and maybe
that's enough transportation to get by for now. And so forth.

The author has a good point in that the expected value in a gamble is often a
better choice than the status quo, but reducing everything to dollars and
coming up with the conclusion that "if you're screwed, put everything on
black," is a fallacy.

~~~
ewjordan
_If she gambles and loses, then she's basically dead broke and can't even buy
food, and if we're assuming she has no outside sources for help, then she is
supposedly going to starve to death._

Yes, this is a very good point, perhaps the way I should have phrased the
example was that she had $130 left in the bank after obtaining the necessities
of life, to remove that concern. In that case, I think the logic goes through
a bit better.

 _She can make the gamble of driving without a license, as the risk of being
caught by the police is a lot less than losing everything by betting on
black._

In my example, that's exactly what I did (I drove as little as possible, but
on occasion I had no choice), and I did, in fact, get away with it long enough
to get my license back (it's worth noting that had I not gotten away with it,
getting my license back would have been a much more troublesome process). But
be aware, I was pretty lucky - if your license is taken away, your plate
_will_ get flagged if the car is registered in your name, and you'll
absolutely get pulled over if a police officer sees you driving and has
nothing better to do. My girlfriend was pulled over several times while
driving my car during that period, and then immediately let go when they
realized it wasn't me behind the wheel.

 _reducing everything to dollars and coming up with the conclusion that "if
you're screwed, put everything on black," is a fallacy_

Indeed, it's not always the right solution - but it's also wrong to assume
that just because the odds are against you in a bet, you shouldn't take the
bet, if the other option is to do nothing, especially if doing nothing leaves
you screwed anyways.

------
jfager
Or: go to the courthouse to get on a payment plan or ask the judge to waive
the ticket or let you perform community service. It's not like you're the only
person ever who hasn't been able to pay a ticket, that scenario gets handled
all the time with zero drama.

~~~
patio11
The notion that "this is probably negotiable" is one of the things that
persistently separates rich people from poor people in my experience. (That is
partially a knowledge thing, partially a culture thing, and at least partially
a "people tolerate rich people having a cavalier disregard for The Rules a lot
more than they tolerate poor people in the same situation" thing.)

~~~
ewjordan
_The notion that "this is probably negotiable" is one of the things that
persistently separates rich people from poor people in my experience._

When I landed myself in this situation, that was exactly the problem: I felt
like the Big Bad Court System would _never_ cut a stupid kid like me any
slack, and it just never occurred to me that I should talk to them and see
what could be done about it. After trying unsuccessfully to deal reasonably
with the DMV on the issue, I sort of assumed every aspect of the government
was always out to screw me over in any way possible.

Live and learn, I suppose.

------
gojomo
I clicked through expecting to be disappointed... but by golly, there's
something to this. An imminent, disproportionate late-fee can make a less-
than-even chance of instant liquidity more valuable than a more-than-even
chance of larger loss.

Of course, assuming any reasonable credit is available at all, and that the
person is not in permanent deficit unable to eventually pay back a loan, would
give rise to a dominant option C, where enough is borrowed to avoid the
penalty. But maybe this same effect is what makes 'payday' loans at
astronomical effective rates attractive to some people.

Is there some other 'guardian angel' business model possible from this effect
-- protecting the liquidity-challenged from disproportionate late fees, via an
automatic loan of just-enough to save the fee, splitting the savings with the
affected person?

As in: seconds before BofA or some other institution is about to pillage
someone for $30, the 'angel' swoops in with a just-in-time loan, charging the
person (in fees and interest) any amount less than $30 -- and lower with more
competition.

~~~
jrockway
_As in: seconds before BofA or some other institution is about to pillage
someone for $30, the 'angel' swoops in with a just-in-time loan, charging the
person (in fees and interest) any amount less than $30 -- and lower with more
competition._

It's called a credit card or savings account.

If you have a credit card, you can't overdraw it. Or you can link your
checking account to it, avoiding the "we're loaning you money even though you
didn't ask for it" fee. Or you can have a savings account, and dip into that
when your checking account runs out of money. Or you can just not run out of
money.

I got hit with an overdraft fee back when I was in college even though I
explicitly opted out. I didn't make that mistake again. I stopped using a
debit card and started using a credit card again... and now I even get 1.5%
cash back. (If this happened to me now, I would have just filed a complaint
with the state's attorneys general office. Customer service doesn't want to
help? Enjoy the fine and new regulations.)

~~~
gojomo
Yes -- that's what someone who's on the ball does, using a short-
term/reasonably-priced source of extra funds to avoid late fees.

The theory of the 'guardian angel' service is that it handles things even when
you forget. It presupposes that there's some way to give the service total
visibility into your imminent payment deadlines -- of course right now that
doesn't exist, and the businesses that rely on late fees for their margin may
not want it to.

But this might be an appropriate area for an industry consortium or even
regulation to create a clearinghouse. If you're about to fine someone $X for
an amount due up to $Y, you have to broadcast it on some confidential national
clearinghouse an hour before assessment, allowing a contracted representative
of the target to settle it on their behalf. If you do this, your fine is
considered reasonable and customary; if you don't, it's presumed to be
trickery and held to a higher standard.

I agree it's farfetched. But when we're talking contrived scenarios where
people living hand-to-mouth should play roulette, the imagination wanders!

~~~
jrockway
So this service is for someone who can't sign up for a credit card, but can
sign up for a service that reads their bank account, anticipates future
purchases, and tries to keep the balance up?

Yeah.

 _But this might be an appropriate area for an industry consortium or even
regulation to create a clearinghouse. If you're about to fine someone $X for
an amount due up to $Y, you have to broadcast it on some confidential national
clearinghouse an hour before assessment, allowing a contracted representative
of the target to settle it on their behalf. If you do this, your fine is
considered reasonable and customary; if you don't, it's presumed to be
trickery and held to a higher standard._

Who pays for this? What's the penalty for "trickery"?

~~~
gojomo
The penalty? You're more likely to lose class action lawsuits like the ones
that have recently stung some banks, or you're fined by regulators directly.

Compared to electronic stock markets, or check/charge clearing, or even the
Twitter firehose, this "identity M is about to be fined $N" live book is
pretty simple. The 'angels' or regulators could pay for the system, but those
who wish to assess late fines would be responsible for their own prompt
reporting.

For example, the law might be: "To charge a late fee that represents an
effective interest rate more than 10 times the prime rate, electronic notices
of intent-to-charge must be filed both 1 day and 1 hour before assessment, and
electronic payment from third parties must be accepted."

------
Dn_Ab
I do not think the reasoning in this piece is solid. Firstly the concept of
expected value only make sense over repeated trials of the same experiment and
using it here on a one off is a misapplication. Unless the person is expecting
many such tickets. At which point the combination of the person's stupidity
and statistical _variance_ will have them broke a lot quicker. The expected
value is no more meaningful as a dollar amount as 2.5 is for average number of
kids to a family.

The other portion is the fact that the $250 is a _sunk cost_. Future decisions
should be independent of that money lost. Rationalizing gambling using _cost
relativity_ since gambling on an already expensive bill "will save you money"
is not logical. It won't save you money unless you keep doing stupid things at
which point you are already losing alot of money - its on average meaning
repeated trials. Simply irresponsible. I'm either gonna win $130 with 47%
chance or lose $130 with 53% chance. My $250 bill is sunk and completely
independent of this decision and outcome. Otherwise any time I have an
expensive bill to pay and will be left with only about $130 why not gamble it
save the amount I need to pay in the long run. This is the start of a gambling
problem.

~~~
ewjordan
_I'm either gonna win $130 with 47% chance or lose $130 with 53% chance. My
$250 bill is sunk and completely independent of this decision and outcome.
Otherwise any time I have an expensive bill to pay and will be left with only
about $130 why not gamble it save the amount I need to pay in the long run.
This is the start of a gambling problem._

No, you're missing the point: the $250 is, indeed, a sunk cost. The $100 fee
that's going to add on if it's not paid on time, however, is not.

Stripping away all the irrelevant details of the problem, the (completely
contrived and artificial, indeed) choice is between:

A) Certainly losing another $100, B) A near 50/50 shot (minus a single-digit
house edge) of either winning $130, or losing $230 (lose the $130 bet, plus
have to pay the $100 "late fee")

The $250 owed is irrelevant to the problem except to trigger the late fee and
set up this payoff structure.

 _Firstly the concept of expected value only make sense over repeated trials
of the same experiment and using it here on a one off is a misapplication._

Whether or not expected value calculations are valid for single shot deals,
are you really saying you'd choose option A in this situation, which loses you
twice as much as the expected loss in option B?

~~~
mattmaroon
Actually EV "makes sense" even when applied only once. You should take any
positive EV gamble you can at any time you can, and avoid the opposite.

Life is a series of one time decisions. You might not get the same exact
gamble again, but you'll get many others, and if you keep taking ones with
positive expectation you'll end up ahead in the long run.

~~~
Dn_Ab
I see your point. But I would say maximize your utility but even that is
questionable. As Daniel Bernoulli (St. Petersburg Paradox) showed, the concept
of expected value to the real world is not straightforward.

Short of it is: I don't agree. Those other situations are not the same event
as this and even often completely unrelated. You cant lump them into the same
space and claim positive expectation on their value.

~~~
mattmaroon
Let me put this another way. If you take every suitable gamble you can, even
if they're one time deals, you'll end up further ahead in the long run than
the guy who only takes suitable gambles that are repeatable. Thus whether or
not the gamble is repeatable should have no bearing on your decision.

(I'm using the term suitable somewhat vaguely here, since even +EV gambles can
be bad ideas in the long run due to bankroll considerations. But for what
we're talking about, we're assuming all the gambles are the same in all other
respects.)

------
lsc
The problem here, I think, is that the problem as stated only works out if
having $0 dollars is no better than having -$200.

I don't think this is the common case, but there are cases where that makes
sense, for instance if keeping a license enables you to keep a job that will
allow you to easily pay off the debt, or, if you multiplied the numbers by
1000, and assumed the poor person was willing to declare bankruptcy. In that
case, you might have a point; Really, I think this is why buying a house at a
time of obvious volatility is such a good deal, assuming you have no other
assets. If prices go up, you have put 5% down on an asset that is appreciating
quickly. In the up market, housing was appreciating at north of 10% a year;
that's 10% of the total home value, of which you maybe put down 5%. If prices
go down? you walk.

The question, in that case, is how much does declaring bankruptcy cost? I
mean, you have the up front lawyer costs... then you have the problems
associated with having bad credit. but I can see many cases where taking the
gamble would make sense.

------
illamint
_And for God's sake, man, pay your tickets before they're overdue, a few
hundred bucks is nothing compared to the pain of trying to get just about
anything done at the Connecticut Department of Motor Vehicles!_

It's true: I just moved to CT and had to deal with transferring a car title,
registration and license from out of state and it was a _nightmare_.
Definitely would've rather spent the 8 hours and ~$350 at a casino, of course.

~~~
krschultz
+1 because I just did the same thing. CT DMV has to be the worst in the
country.

------
hitonagashi
The problem for me is that if you are in that situation, it may work for a one
off...but if you are poor, that isn't going to be the only occasion a
situation like that comes up. If your solution is gambling to resolve
problems, your luck will eventually run out and leave you in an even bigger
mess than when you started.

------
araneae
Tangent:

I always thought state sanctioned lotteries were highly immoral. Sure, they
want the tax revenue, but poor people are disproportionately the victims of
what feels like fraud. The people believe that have a chance at winning what
they most certainly do not.

It's like reverse welfare- taxing the poor and uneducated for the benefit of
the masses.

~~~
ewjordan
_Tangent:_

Not at all. In fact, I wrote this up because of a conversation I had a while
back with a man buying a lottery ticket at the gas station. I was talking with
him about how bad the odds were, and he fully admitted that he was getting
terrible odds on that dollar.

But he figured that on the one in a million chance that he hit the jackpot,
even if he only saw a quarter of that amount he could actually get out of debt
and start making the power of compound interest work for him instead of
against him, and after enough time with that money in the bank, the scales
would tip in favor of spending the dollar on the lottery ticket.

Now, I don't think that argument really holds water, and I told him so (for
several reasons, even apart from my skepticism that he'd actually put any cash
he won into a properly managed account without spending a huge chunk of it
first; the odds at the lottery are _so_ hideous and the doubling time for a
quarter million that you're also drawing money out of to live off of is very
long, so it would be tough to make those numbers work out), but it got me
started thinking about whether there might actually be situations where a
losing gamble could be worthwhile, depending on the current situation of
indebtedness.

~~~
mattmaroon
This is exactly why the lottery is called a tax on the poor. For one, it's
hard to think about expected value when you can't pay your bills.

Also people greatly overestimate their odds of winning big prizes like that.
If the odds of winning the lottery were 1 in a million I'd be buying tickets
by the truckload.

~~~
ewjordan
Fully in agreement here. And actually, I agree with the moral of what you've
said almost elsewhere else on this thread; I meant this post to be a bit more
tongue-in-cheek than I suspect it came across, I definitely should have made
it more clear that I don't _really_ think poor people should be heading to the
casino every time they come up short when rent's due. :)

------
sliverstorm
> In the end, though, I did nothing, my license was revoked, and I had to live
> without one until I was able to come up with the extra cash that it took get
> it back

Maybe that was the best solution? Having to live without a privilege such as
your licence seems like one of the best ways to teach you not to let your
registration expire next time. Stay on top of things, and don't let the first
late fees happen in the first place. If you STILL don't have enough money,
you're living beyond your means, plain and simple.

------
seles
"Let's assume for the moment that Mary has no safety net; there are no friends
she can ask to float her a loan, no family members that she can reach out to,
etc."

But this is almost always a false assumption. It would be better to borrow
money to pay the fee in time. Can anyone think of a case where it actually
would be better to gamble (at expected loss) than borrow money?

~~~
DrStalker
Maybe her friends are sick of watching her gamble her last few dollars away
whenever there is an emergency.

------
skowmunk
Dunno abt poor people gambling more, but they sure can get educated more - so
that they can at least calculate their odds better.

------
rkosai
What about the case for a startup? Say, you raise $500k but you "know" (for
the sake of argument) you need a million to make the thing work.

No gamble: 0% chance of success * 53%

Put it all on black: non-zero chance of success * 47%

I don't imagine this would go over very well with investors, though.

------
ojbyrne
Of course, poor people _do_ gamble more.

------
javanix
And uneducated people shouldn't read this at all.

