TWO REASONS PEOPLE REFUSE “COIN FLIPS” BETS
and the importance of considering what’s “out of scope”
Thread, 1/N
and the importance of considering what’s “out of scope”
Thread, 1/N
2/ A classic “surprising phenomenon” is that people offered a bet such as “I flip a coin; if heads, you win $1000, if tails, you lose $950” tend to refuse playing.
The surprise comes from the fact that, in theory, the bet has positive expected outcome: $25.
(1000*50%-950*50%)
The surprise comes from the fact that, in theory, the bet has positive expected outcome: $25.
(1000*50%-950*50%)
3/ However, there are two explanations for which it’s rational to refuse such a bet.
4/ First, if someone comes to you with a “free lunch” bet, it’s rational to be skeptical. Is he a swindler?
5/ Second, non-ergodicity, explained in the example below 
6/ These two reasons explain why we often decide not to engage in “games” with positive expected outcome.
7/ However, we also often engage in activities with negative expected outcome. Why?
8/ Three reasons. The first, is a mirror of swindler argument above. There might be things we don’t know, and if the known downside is low, it might be worth trying.
9/ Second, non-ergodicity again, but this time flipped over.
https://twitter.com/dellannaluca/status/1360243556095557636?s=21
11/ Either way, the common thread is:
when an action seems irrational, look for rationality outside of its apparent boundaries.
when an action seems irrational, look for rationality outside of its apparent boundaries.
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