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Comment by jbooth | Hacker News Reader

If traditional economics, specifically "Econ 101" (which is actually what he disparages in the article) applied, the poor wouldn't be so dumb with their money, wouldn't be the biggest buyers of lottery tickets, drop out of school disproportionately just for being poor, etc.

According to "Econ 101", people are supposed to pursue their rational self-interest and maximize utility regardless of their conditions. Which is a bit of a problem with all of economics, and a huge problem when it comes to applying it to the poor.

Does that make sense?

I read an interesting paper a few months back about the lottery ticket thing. This guy's theory was that it actually was rational, because many poor people don't have access to bank accounts, they just buy a scratch ticket every day and that's effectively a probabilistic bank account. Dunno that I buy it. But a neat thought.

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Traditional economics characterizes the poor as having a very high discount rate. Thus, they assign a low value to events which might happen in the future - that is, a high paying job in 5 years is less valuable than using meth now.

In much the same way, I (a middle class person) would rather have $100 now than $102 in 50 years.

As for lotto tickets, traditional econ says the poor derive utility from playing lotto, not just from winning. Am I foolish and not obeying the laws of economics for buying video games, which have an expected payoff of $0?

So, the original author's point was that the discount rate thing applies differently than you're applying it.

They're not choosing less satisfaction now rather than more satisfaction later. They see things as hopeless (too many bee stings), throw their hands in the air and say screw it. A 0% chance of a high-paying job in the distant future discounts to 0 utility at present for any discount rate.

Karelis isn't talking about discount rates at all.

He is claiming the poor have a flat utility function with a kink at zero. I.e., the ability to cure 1 bee sting (out of 5) now is worth nothing to them, only the ability to be bee sting free holds utility.

I think to understand the point I'm trying to make, we could re-examine your previous statement: "Am I foolish and not obeying the laws of economics for buying video games, which have an expected payoff of $0?"

If the laws of economics predict that you shouldn't buy that video game, then you're not foolish -- they are.

People's behavior changes radically when you give them experimental situations that involve gaining or losing money -- they're way more risk averse with losing 100$ then they are with changing their odds of winning 100$. This isn't baked into the assumptions that economics makes, and neither are a million other wrinkles of human behavior.

"What economists say" isn't the be-all and end-all, it's just another prism to be used.

If the laws of economics predict that you shouldn't buy that video game, then you're not foolish -- they are.

The laws of economics make no such prediction, and they make no corresponding prediction about lottery tickets. That's the point.

There are places where the laws of economics don't work, I just don't believe that your previous post (or Karelis article) identifies any of them.

Thus, they assign a low value to events which might happen in the future - that is, a high paying job in 5 years is less valuable than using meth now.

That's two different classes of events and you are misrepresenting what was claimed by attempting to further devalue poor peoples choices by saying they would rather use meth than work. It's also insulting towards poor people to imply they are all meth users. A proper analogy would be that they disproportionaly value a job they can have right now over a higher paying job they can have in 5 years.

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