Scenario Involving Risk and a Loss of Money (cost, thoughts, great)
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If you had a choice between losing $15,000 right now and putting your name into a lottery of 1,000 people where the "winner" of this lottery loses $100,000 (while everyone else who participated in this lottery loses nothing), which choice would you make?
I'd imagine that most people could use a math lesson.
So, let's do the math.
But, let's change the numbers to make a bit more sense.
Option A: Lose 15,000
Option B a 10% chance of losing 100,000 - an expected loss of (.1 * 100,000) 10,000.
So, the obvious choice is to choose the 1/1000 chance of losing 100,000.
But, in life, things aren't always that cut and dried.
Imagine a ridiculous scenario in which you had exactly 100,000 available to you and your loved one needed an 85,000 life-saving operation tomorrow.
Were you to lose the full 100,000 it would cost you your loved one's life.
Whereas if you lost only the 15,000 you could still save your loved one.
It's certainly arguable that taking the 15,000 loss is the right call in that situation.
Everyone has different tolerance for risk - for whatever reasons
I'd imagine that most people could use a math lesson.
So, let's do the math.
But, let's change the numbers to make a bit more sense.
Option A: Lose 15,000
Option B a 10% chance of losing 100,000 - an expected loss of (.1 * 100,000) 10,000.
So, the obvious choice is to choose the 1/1000 chance of losing 100,000.
1 out of 1,000 is a 0.1% chance, not a 10% chance. Expected loss = .001 * 100,000 = $100.
A lot of "studies" have demonstrated that people view incurring a loss more unfavorably than getting a gain. In a choice between a sure loss of $15,000 vs. a 20% or 30% probability of $100,000 loss almost all people would prefer the latter. And most of them would be right.
If these were stock speculators or money changers, it would be different because they see make these choices all the time.
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