Comment by DmitriLebedev | Hacker News Reader

Comment by DmitriLebedev | Hacker News Reader

IMO, it is fair that the book was ignored.

The guy completely ignores the time and risk factors, namely being short-term-payoff-oriented and long-term-payoff-oriented. This is a subject of microeconomics (not 101, of course - it's a lot of maths, integrals and derivative functions).

Poor people do not save extra money exactly because of being short-term oriented. Drugs, entertainment and having early sex also deal with short-term payoff. Short-term payoff orientation also makes a person more risk-tolerant, which is a common attribute of criminals.

All the given examples are easily explainable with a utility function that takes into account risk perception and time discounting (long- or short-term orientation) and current posessions.

Committing a crime or not is a choice between risky and not risky opportunities. This deals with risk perception. Few posessions make the low-risk choice even less valuable. Fixing or not fixing dents on a car fit into choice between long-term and short-term payoff.

Writing this I suspected that the author hasn't worked with advanced microeconomics' maths. Indeed, Karelis is a philosopher. I haven't seen the book, but by his words ("Econ 101 is to blame") suspect that he doesn't know any more complicated economics. That's the reason he finds it wrong.

I will upfront admit only a limited knowledge of economics, but hopefully my math knowledge will save me enough to sound reasonably collected.

I think you make two assumptions here that are either fallacious, or require additional evidence.

The first is that the poor are short-term oriented by choice, not by mandate. Allow me to propose the following Gedankenexperiment. You are a person who is given sufficiently low pay that your net asset change is $0, or nearly so. You are presented with an opportunity for a long-term payoff with a reasonably attractive expected gain, excepting that if the payoff doesn't occur, you no longer have the wherewithal to pay for food and shelter. If you don't take the risk, you are given a near certain probability to maintain your current status. Which would you chose? Keep in mind, these people will place maximum utility on the basic needs of life before venturing into more discretionary purchases, as any one else would.

The second is that they are somehow inclined to take greater risks because of their being in poverty. I'm not convinced by an assertion that even a majority of poor people end up in a life of crime, or any other high-risk behavior. It would seem to me there's far more reason behind staying as low-risk as possible, especially when the few possessions you refer to are the difference between staying warm and dry, and not. A person with several thousand dollars in the bank can afford to play high-risk. A person who is in poverty may be one case of pneumonia away from homelessness.

Indeed. On the subject of long vs. short term thinking, or the time-value of money, the most clear example is the case of rent-to-own stores.

Rent-to-own is a form of financing, equivalent to taking on debt, but unlike other forms of debt, we know that it's used specifically for buying certain classes of durable goods, such as furniture, appliances and televisions. Due to the nature of these goods, we can assume that in most cases the owning of a given piece of furniture, for example, is not a necessity, and further, that buying these goods new is not the lowest cost alternative, when speaking about the total or even initial price. For example, I might be able to get a sofa off the street or sleep on a mattress without a frame or box springs.

Rent-to-own is also heavily favored by poor folks, who have another opportunity, which is to save up and replace their television or furniture at a later date for a lower total cost.

Making the latter choice is the rational one, if your personal discount function for the future value of money is sufficiently low. That is, if you have a long-term perspective, you value future abundance nearly as much as present abundance, and so save up for an outright purchase. However, if you have a short-term perspective, the extra you paid for the television would seem insignificant, because it accrued far in the future, and you're more concerned with immediate abundance.

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