Monday, January 13, 2014

The Limits of Epistemology: The Regret of a Life in the Now

"The lottery is a tax on stupidity"—an ever so glib canard gripped lightly between the dentures of anyone who's studied even a modicum of statistics. The expected value of a lottery ticket, once you run it through the probability calculator is a few fractions of a cent more than negative whatever you paid for it. Put this way, if Richard Pryor in Superman III tried getting rich off the other side of the lottery game, Lex Luthor would have laughed him off and teamed up with The Penguin, and I mean Danny DeVito Penguin, not Burgess Meredith Penguin.

So are people who buy lottery tickets just chronic, irredeemable buffoons? Think very carefully before you answer. Consider that you might not be able to adequately adopt a complete sympathetic perspective of the scratch ticket customer. Consider for a moment if you will that the great benefit axioms of rational behavior offer is to allow us to work through logical relationships between prices, institutions, and behavior rather than to yield synthetic propositions about how the world, she actually is.

What I beg of you is to apply something akin to the Lucas Critique to questions of individual behavior: "features which lead to success in short-term forecasting are unrelated to quantitative policy evaluation, that the major econometric models are (well) designed to perform the former task only, and that simulations using these models can, in principle, provide no useful information as to the actual consequences of alternative economic policies." In the case of private behavior, it's worse still, since the claims about individual "irrational" behavior is grounded in a synthetic version of an analytical construction of rationality!

The waterfront bar version of my critique is this: who the hell do you think you are, Mr. High & Mighty thinking you can tell me my business? Furthermore, the dependent variables in your econometric specifications are proxies. And you cannot know how much more imperfect they'll be after you change the treatment. But you know as well as I *hiccup* do that if you yield to the coercive hand of the state the authority to modify my personal, private behavior, they won't stop until the oceans are drained. Pick your Doma Castle poison: drugs, alcohol, currency exchange—prohibition ends in blood. And flying on the back of political promises to reform the behavior of low-status, politically voiceless constituents, experience suggests that the creep from suggestion to mandate to leading the world in incarceration rates is not a logical fallacy.

Ex post regret is possibly a problem for some people. But only possibly. Even if genuine, it's hard to verify. Furthermore, the prior restraint imposed on Jones for Smith's expectation of regret violates both the non-worseness and precautionary principles. Context-rich decisions about private behavior, whether it's retirement planning, nutrition decisions, child rearing habits, or intravenous drug use are epistemologically null outside Dunbar's Number. Pretending otherwise is the pretense not just of knowledge, but the hubris of control.

But we here at EE don't like to merely squat astride coercive society and grunt "nein". We support constructive alternatives. In this case, "externalizing internalities" means clearing the cobwebs that obstruct strong social networks. It means that we stop jailing fathers for petty drug offenses. It means we put the police back to work detecting crime rather than playing at highway bandit or Marine. It means we ease off on the civil planning thumbscrews, returning content control back over to teachers and parents, allowing creative destruction in sclerotic institutions. It means prudently discarding failed coercive enterprises. It means accountability.

It means a wider breadth of euvoluntary institutions and a narrower breadth of coercive institutions. Limiting ex post regret is tough work. Pretending otherwise by petitioning the state is a sure path to exploitation, tyranny, and moral decay.


  1. Considering what we know of prospect theory and loss aversion, what of buying lottery tickets is more about minimizing ex post regret when someone else in your state (or down the street) wins powerball the week you don't play. Throw in a dash of Taleb and our perception of low probability events, and you've got a more realistic psychology than simple autistic economics can provide.

    1. You're the second person to make that comment. I agree with it, but Prospect Theory is something you sell to economists. MYOB or even "lottery tickets are a relatively cheap thrill" is something folks who've never studied the subject can easily grasp.

  2. Marketmen said apart from rising demand at the spot markets, a firming trend in base metals in the global markets, influenced aluminium futures.


Do you have suggestions on where we could find more examples of this phenomenon?