Friday, December 11, 2009

The evidence I see vs. the evidence I don't want to see

Tyler Cowen writes about a restaurant where you roll 3 dice after your meal and get the pizza for free if you roll 4-3-1. He writes:

I take this as evidence against the view that people systematically miscalculate expected utility in repeated, real market settings. If they did, you would expect to see commercial lures like this much more often. Maybe in mortgage markets, or credit card markets, people are overoptimistic about the bad (too many floating rate mortgages or too many people accepting the risk of high default fees), but I don't think in pizza markets they are overoptimistic about the good. A restaurant which makes this kind of offer, of course, has to charge systematically higher prices, the greater the customer's chance of winning the lottery,

I wholeheartedly agree. If people systematically miscalculated expected utility in repeated, real market settings you would see a lot more stuff like, for instance, rip-off "extra warranties" when you purchase electronic equipment, or maybe even "lotteries," slot machines, roulette games etc. with negative expected payoff that people participated in regularly, etc. Good thing that's only the stuff of science fiction.

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