Hacker News Reader

Comment by endisneigh | Hacker News Reader

The problem I think is that there are asymmetric outcomes and the quality of life changes are exponential.

Let's say you have $1000 and there's a 1% chance you can 100X your money in a year by buying $AMAZING. Someone will look at this and say, well, if I 100X my money then I'll have 100,000 and I can buy a house. If it goes to zero I'll be broke, but I was already broke anyway so nothing changed.

A rational person will say, yeah but if you took your $1000 and invested at a regular rate of return of 10% and waited 50 years I'd have $17,000! An excellent return on investment, except now your entire life has gone by.

edit: I actually meant to say 30 years instead of 50 but will leave the error up for transparency's sake! At 50 years it's more like $120K or so.

View on HN

> quality of life changes are exponential

generally they're logarithmic.

that's why billionaires are still basically people, instead of just writhing around in orgasmic ecstasy all of the time.

That's true - the real shape is probably S-shaped where as you go from poverty to just above the poverty line the gains are exponential and as you go from above the poverty line to upper middle class it's maybe linear and then upper class to "rich" it's logarithmic.

It's s-shaped insofar as "it's expensive to be poor"[1], but the solution to that isn't to gamble, it's to save.

[1] eg. buying a 4-pack of toilet paper rolls every week rather than buying 2x 48 packs when it's on discount.

oh I completely agree, but you don't see the gains for a very long time so for some people gambling is a way to quickly escape the trap.

I would say linear. Once you taste that $500 steak, it loses its luster super quick.

linear would imply a $500 steak is 10x better than a $50 steak, which probably isn't the case.

> A rational person will say, yeah but if you took your $1000 and invested at a regular rate of return of 10% and waited 50 years I'd have $17,000!

How about $117,000 though

Yeah, is the thing that catches people up about compound interest. The original poster's argument (and math) makes sense if they wait 30 years (17K return), which is still a long time. However, waiting another ten years gives them ~40K, and waiting another ten years after that leaves them with ~117K.

meanwhile deliberate inflation is stealing the value of that money over 50 years. For reference, today's dollar has half the purchasing power it had in 1970. So for your example, 50 years of savings = $25,000. That barely covers the cost one year of health insurance for someone 70 years old.

And that is all based on the premise of living to age 70.

One of the arguments in favor of having sustained, moderate inflation is that it forces people to invest for precisely this reason.

Anyway, assuming a 3% inflation rate, the original $1K still turns into $30K after fifty years.

It's also worth pointing out that most people in the states qualify for Medicare Part A after they turn 65. Even if they don't, the average monthly health insurance premium for someone who is 70 is around $550.

So going off of your example, the original $1K purchases around four-five years of health insurance after inflation. This is a good deal.

Yes, if you'd invested 1000 at 10% over 50 years you'd have 117,000. But let's stick with what OP said.

>if _you_ took _your_ $1000 and invested at a regular rate of return of 10% and waited 50 years _I'd_ have $17,000! An excellent return on your investment except your entire life has gone by

If we took this at face value, it means the 17k must have been some sort of consulting fee or something. I guess he's saying don't wait 50 years for a 17k consulting fee which you can't really argue with. Either that or OP should check his math

haha, sorry I actually meant to say 30 years (I had the formula more or less memorized for mortgages which were 30 years, but 20 years more makes a huge difference, as it tursn out!).

This is a good description of why people throw money at lottery tickets (like actual lottery tickets), particularly those who probably shouldn't be.

Just an aside: the first scenario you suggest, in which you have a 1% chance to 1000x your money and a 99% chance to lose it all, has an expected value of 10. It is absolutely rational to make that bet if you have enough capital to withstand a drawdown of let's say, 5x your initial bet.

For example, suppose you model this as a game with the following rules:

- you start with $1,000,000

- each turn you may bet $10,000

- if you bet, you roll a d100

- if you roll a 1, you earn 1000x your bet, if you roll anything else you lose your entire bet

- the game ends after 1000 turns or you lose all your money, whichever happens first

If you bet every turn, on average you'll end the game with approximately $60,000,000.

EDIT: Did you edit your comment to be 100x or did I misread? Oh well, leaving this here for posterity. If the win outcome is 100x, the EV is still 1.

Why not both?

For the defense of passive investing, I liked "A Random Walk Down Wall Street"[1]. There are like 7 editions of this book because it was true when it was published nearly 50 years ago and still true today. Maybe someday it won't be true, but that hasn't come.

But why not also put money into hot stocks that you like? Did $Company change your life? Buy their stock. Or have fun speculating with a little money.

[1] - https://www.amazon.com/Random-Walk-Down-Wall-Street-ebook/dp...

> [$1000 at 10% for 50 years] I'd have $17,000

Your math is wrong by almost an order of magnitude.

The rule of 72 is handy for thinking about growth rates. Divide 72 by the rate to get the doubling time.

At 10%, it will double approximately every 72/10 = 7.2 years. So about 7 doublings in 50 years = 2^7 = 128. So you can estimate in your head that the answer is roughly $128,000 and $17,000 is completely wrong.

Ah, yes I meant to say 30 years, not 50. Thanks for the correction. the rule of 72 is a good one, and is what I actually used, the problem is that I did the math on 30 years but 50 years was a better number to use to make my comment, but I didn't update the number :(

Reply on news.ycombinator.com