Nation of Beancounters

If you love me, you’d take my money

Posted in Uncategorized by Navin Kumar on April 23, 2011

From an article on precommitment at Reason Magazine:

For years the economists Dean Karlan and John Romalis kept their weight down by means of a clever pact. Karlan and Romalis knew a little something about incentives, so they struck a deal: Each would have to lose 38 pounds in six months or forfeit half his annual income to the other. If both failed, the one who lost less would forfeit a quarter of his income. They lost the weight and generally kept it off, although, at one point, Romalis’s weight popped back up over the limit and Karlan actually collected $15,000 from his friend. He felt he had no choice. He felt he had to take the money to maintain the credibility of their system, without which they’d both get fat.

It’s full of fascinating tidbits on hidden rationality.

…back in the 1970s, the sociologist Ivan Light looked at numbers gambling in Harlem and saw not a diversion or even “a tax on stupidity” (the term derisive economists use for state-run lotteries) but a functioning financial system-and an effective precommitment device to help people save. What outsiders didn’t seem to understand was that Harlem residents didn’t trust, and weren’t well served by, banks. The so-called numbers racket, illegal though it may have been, partially filled this vacuum.

First, remember that the winning number is always just three digits, 000 through 999, so the odds of winning are a far-from-astronomical 1 in 1,000. And while the pot never contains millions, a winner who bet $1 might clear $500 after the customary 10 percent tip to the runner, who carries the loot back and forth. (Naturally, no taxes are paid.)

How did this add up to a savings plan? Survey data showed that the players were persistent, with nearly 75 percent playing two or three times a week and 42 percent playing daily, for years on end. In other words, they acted something like long-term investors. And they were likely to get back $500 for every thousand bets of $1 each. That may not seem like much of a return on investment, but bear in mind that many players bet with quarters, a sum that even among the poor tends to vanish unaccountably. They got some hope. They couldn’t raid their “savings” until they won. And their money also bought convenience: Numbers runners made house calls, and these visits no doubt helped people keep playing.

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