Economic Research

You are stopped on the sidewalk by a PhD student in economics with a government grant and an armed Homeland Security bodyguard.

He demands that you empty your pockets and give him your wallet.

He then calculates 10% of your cash holding and charges one of your credit cards for that amount. He then cuts all of your credit and debit cards in two.

He then returns 20% of your cash to you and puts the remaining 80% in a large envelope.

You are then given a choice :

1. Take back the envelope with the 80% of your original cash holding.

OR

2. Choose between two identical envelopes, one of which is the envelope in 1.) above but now with 160% of your original cash, and the other of which is filled with blank paper.

Do you choose 1. or 2., and why?

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I fail to see how this is

I fail to see how this is research. You think you're getting a sample here that represents... what? Libertarian loudmouths?

Anyway, you pick (1). Voluntarily picking (2) is to potentially accept transfers from an unwilling victim.

1. Lower risk.

1. Lower risk.

Treating the 10% charge as a

Treating the 10% charge as a burned dollar, I choose option 2).

I'll take number one for the

I'll take number one for the same reason cited in comment two.

Depending on how much money

Depending on how much money I have on me I might be risk-averse or not. On an usual day I'd pick 1 because I go around with a large amount of cash and in no way am I going to risk on such a lottery!

I'm not sure what all the

I'm not sure what all the window-dressing is trying to demonstrate. I'm sure there's a metaphor here that's getting lost in trying to be a word problem.

The word problem is straight-forward: given a choice between X guaranteed and a fifty/fifty chance of double-or-nothing, what do you do? That of course depends on risk tolerance, which varies by individual and by the size of X.

As worded, X is a fairly trivial amount, equal to about what I carry in my wallet. My credit cards and debit cards can of course be replaced; presumably this psychopathic grad student hasn't destroyed my bank account or any of my other assets nor revoked my lines of credit.

Since I'm probably rather irritated at all of this, I'll just take the guaranteed return of my money, then have my bank do a chargeback on the 10% the pencil-neck charged to my card. And write a stern letter to his thesis advisor while I'm at it.

So what was the point here, again?

I choose option three: take

I choose option three: take out the Homeland Security thug with my kung fu magic and get my hands on his gun. I then proceed to shoot the PhD student:

a) Because he stole my money

b) On philosophical grounds because he's an economics PhD student accepting government money

Yeah, I'd be more upset

Yeah, I'd be more upset about the intrusion and grab my money back.

(2), because the expected

(2), because the expected payoff is the same and I feel lucky, punk.

I think I'll go buy a money

I think I'll go buy a money belt this weekend. :grin: