

A study I'd like to see done - dfranke

Ask the following question to twentysomething males whose net worth is not currently above $250k:<p>Suppose someone offered you the following wager: consider your net worth on the day that you turn 55.  If it is greater than $n, where n is adjusted for future inflation, then your worth doubles.  Otherwise, you lose all but the last $5000 of everything you own.  If you are in debt, your debt doubles.  What is largest value of n for which you would accept this wager?<p>I'd be fascinated by the results of a controlled study which compared how answers to this question varied across cultures.  Anyone want to posit any hypotheses, or give their personal responses to the question?<p>Edit: perhaps the question should be changed to "consider the highest that you net worth has ever been...", to accomodate the case of people who have already gotten very rich but given most of it away.
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brianr
For me: n <= ~10,000.

This isn't a very enticing wager--it seems like I have a lot more to lose than
to gain. If I set n at, say, $1M, then I might win $1M, which would be nice,
or I could end up with basically nothing, which would be devastating. You
might have a more interesting wager if $5000 were changed to something more
substantial, like $250k.

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dfranke
> If I set n at, say, $1M, then I might win $1M

I'm not sure whether you're understanding the wager correctly. If you win, you
double your entire savings, not just gain $n.

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brianr
Oh, that's true. Still, I think the wager is too scary for most people to
accept for large values of n. Even if I set n=1M and have 10M when I'm 55,
gaining the extra 10 million will make significantly less of a difference to
my life than losing all but $5k will.

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staticshock
that's the point of the study

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rms
There was a simpler question about risk on the first Y Combinator application:
[http://web.archive.org/web/20050324021230/www.archub.org/sfp...](http://web.archive.org/web/20050324021230/www.archub.org/sfpapp.txt)

>If you could trade a 100% chance of $1 million for a 10% chance of a larger
amount, how large would it have to be? Answer for each founder. (There is no
right answer.)

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mynameishere
Quite a study. I'd like to see a study in which a group of very young children
(even babies) are made to populate a controlled environment (where they are
served by Automat-style food dispensers) in order to see what form of
government they develop in such an untarnished state of nature.

My guess? Anarcho-syndicalism tempered by naptime.

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dfranke
My guess is something closer to Lord of the Flies.

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andreyf
21 Male/USA - Depending on how the wager is presented, I could probably be
sold on $n = $1 billion.

For example, one should consider it a motivational tool - sure, most people in
my position _could_ make $1 billion with the right motivation, and this bet is
just the right kind of motivation!

To take such a bet is morally required, because it'll lead me to leading a
life where I create more wealth for humanity, even if I don't reach the $1
billion mark.

So morally, the question shouldn't be about maximizing one's outcome at age
55, but about finding a value that I would deem achievable for the next 35
years.

Also, even if I don't make $1 billion, the kind of skills I'd learn _trying_
to make $1 billion over 35 years would allow me to live a comfortable life
after 55 anyway.

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mattmaroon
Not high. Money has diminishing marginal utility. If your net worth is high,
you get little extra benefit for doubling it.

So I'd say $100k, just off the top of my head. Seems like risking 95 to win
100 is pretty good, not to mention it's trivial to get there.

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dfranke
If it's trivial to get there, then why wouldn't you be willing to go higher?
Remember, you double your _entire savings_ if you win. No matter how quickly
your marginal utility curve flattens, it seems absurdly risk-averse to name
any number lower than half of whatever you think you need in order to retire.

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mattmaroon
I'd need about two mil to retire comfortably I'd say. It's far easier to get
to that from one million than it is to get to one million from $5,000. Hence
I'd be seriously screwed, especially at that age, If I found myself with $950k
and had to lose it all, whereas had I not made the bet, I'd probably be at
most 5 years from retirement.

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dfranke
Two million to retire comfortably? That's quite a standard of living.
Supposing you're earning 6% interest and expect to live to 100, that's a
budget of $10725 per month. That's enough to spend the rest of your life
living in the penthouse suite of a cruise ship.

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mattmaroon
Right. Exactly

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patrocles
Well, it has the problem that people may answer surveys differently than the
same question in real life.

It looks like it tries to expose expected future earnings and risk
(avoidance|tolerance). Did you mean that? If so, that relationship may show in
asset allocation choices by people over their lifetime. Data from any tax firm
would work....

Also, why focus on 20-year-olds with less than 250K? Have you already
established that current net worth and/or age has a quantifiable impact on
risk aversion?

Patrick

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morselsrule
I'd say about $900,000 ( in 2007 dollars).

My logic is that I'd be approaching retirement age. I could/would definitely
plan my career so that I had enough money to retire comfortably, which would
require about $1.5 million. I'm saying less than that just to be safe (and in
case I really want to switch to a less lucrative/more fulfilling career). In
reality, I think I'll make a lot more than $1.5 million, but it's a little too
risky to bet on.

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dfranke
Heh, so among a relatively homogenous group, the first two answers I've gotten
vary by a factor of 90. Nice.

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curi
can't i beat the wager by getting my parents and friends to give me a big pile
of money a few days before my 55th birthday?

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dfranke
Not if you owe it back to them. I said net worth, not gross.

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rms
He said give, which means no obligation other than to the federal government.

