Gambling as socially useful: weight loss betting

A pound of flesh?Alongside prostitution, gambling is one of those moral issues almost guaranteed to evoke visceral responses. It cuts to the core of the eternal socialist/libertarian debate – do we allow, discourage, or outlaw an activity with such obvious negative consequences for individuals and families?

In some cases, however, gambling might not be as bad as it’s cracked up to be. I’ve written before about using betting markets as prediction tools, something that I think will continue to grow in the future. The success of such attempts hinges on the power of monetary gain as a mechanism for yielding individuals’ best efforts. Recently I came across another initiative using the same underlying incentive idea, but with a different purpose: betting on your own weight loss.

Here is one diet casino site, although the simplicity of the idea makes me think that there are probably at least a handful floating around the web. The arrangement is quite simple: set your weight loss target, choose your bet, and provide some self-info. Then the company will tell you how much you stand to win, and check up on your progress at regular intervals (with a mechanism to prevent cheating).

The theory behind this is straight out of behavioural economics – betting is an excellent commitment device. Humans use these devices all the time to bridge the gap between long-term payoffs and short-term pain. Dieting, studying for tests, or being nicer to idiot co-workers all yield dividends sometime in the nebulous future, whereas the associated suffering happens now. The temptation, therefore, is to allow ourselves to cheat. Commitment agreements impose some sort of penalty for doing so (e.g. forfeit your stake in the weight loss betting scenario), to counter the short-term temptation. There is a good paper reviewing commitment devices here.

If it helps people lose weight, it must be a good thing, right? Well, weight loss is certainly a noble goal, and socially useful (fill in your favourite alarming statistic about obesity here). There’s more to it than that, however – some of my thoughts on the idea:

  • Returning to the casino analogy, the odds must be stacked in favour of the company. Although the site I mentioned early claim that they make money from “corporate and government clients who are interested in creative solutions to weight loss”, they still want to make a profit (on average) from each client. Thus those questions you are asked at the beginning (which include the strategy you are planning to use, your reason for wanting to lose weight, your gender and your height) will give the company’s actuaries a pretty good idea of how likely you are to succeed, and therefore how large the prize you are offered should be. Apparently in a normal casino the house edge ranges from 0.5% to 20%+, but since people have the dual goals of fiscal gain and weight loss in this scenario, I would be surprised if this company doesn’t skim even more off the actuarially fair payoff.
  • This flies in the face of standard microeconomic theory regarding risk aversion. Weight loss is an uncertain outcome, so you may end up disappointed or happy. Far from wanting to compound this by then betting on their desired outcome, risk averse consumers should in fact want to take out insurance against the possibility of them not achieving their goal. Any such insurance market would suffer from huge moral hazard problems, though, which is probably why (to the best of my knowledge) no such one exists…
  • Anecdotal evidence suggest that programs with one big weight loss goal and associated payoff (e.g. ‘The Biggest Loser’ TV show) work quite well to induce people to hit that target, but that the improvement is difficult to sustain – i.e. individuals often return to their previous weight. My guess is a crowding-out effect – the extrinsic motivation reduces the individual’s need to develop the intrinsic motivation that would have helped them continue the good habits they began while working towards their goal. I’m guessing that these weight loss bets will suffer from the same problem.
  • Further to the first point above, there’s a bit of an incentive misalignment operating. Individuals are signing up with a company that promises to help them with their weight loss goal (even going to far as promoting the services of their ‘Chief Fun Officer’ in doing so). The company only makes money, however, when their clients fail – something of a problem there.

If anyone has tried such a program as this or knows someone who has, I’d be fascinated to hear about your experience – tell us about it in the comments section below.

What I’m browsing 18/12/13

Some links for your internet pleasure:

Monopoly for finance enthusiasts

Did your family go down the Monopoly road? I think you can tell a lot about family dynamics from measuring Monopoly frequency, at least when the children are between the magic ages (between 8 and 15, by my reckoning). The game is notorious two things: causing fights and lasting for hours. I recently read an article suggesting how to make the game more interesting – go check it out.

My thoughts on Finance Monopoly:

  • Only the British Monopoly - don't give me this crap about 'Boardwalk'!A few more rules are probably needed to clarify the suggested additions. For example, order of debt repayments (does rent owed take priority over debts from previous turns? who gets first claim on a bankrupt player’s assets?), and timing of financial transactions (can you only deal on your turn, or does the engine of finance march on relentlessly?) are two that spring instantly to mind.
  • Boy would these rule changes allow the game to get fiendishly complicated, fast. Not sure about your typical family game on a Sunday afternoon, but if we played this at an Economics and Finance Society meeting, the game would probably last at least a few days.
  • On that note, there could be a role for a dedicated banker and ‘government’ – to hand out money, administer contracts, etc. I actually dreamed up a Monopoly variant like this a few years back, where players would be able to take on roles like ‘builder’ (gets the money from any construction) and ‘tax collector’ (gets a cut of any taxes). Watch this space – I may write a post about it at some stage…
  • For some added game theory fun, the rules could explicitly state that no contracts are enforceable – that is, players are completely free to tell their creditors to go to hell. You’d quickly discover whether a loss of reputation and access to the in-game credit market acted as sufficient deterrents.

My interest is now piqued – I’d quite like to see how a game of Monopoly Finance-style plays out! Anyone got six hours to spare?

Concession tickets on Sydney trains

Cityrail trainSydney Trains (formerly Cityrail) has recently implemented a new policy whereby concession tickets of all stripes – pensioners,students, veterans, the works – cannot be purchased from ticket machines in during certain times. The organisation’s website is cheerfully vague about when these times are, but from my experiences it seems like 9:30am is the cutoff for buying concession tickets from machines.

Now, I love the Sydney Trains ticket machines. They are quick, fairly reliable, and easy to use, plus they are conveniently located at myriad places in busy stations. Buying tickets from a ticket window, on the other hand, is a nightmare. The queues to occasionally stretch out the door of the station, communication is often difficult with the employee (partially due to poor microphone quality), and there are far fewer ticket windows than ticket machines. A combination of the factors I’ve just mentioned has caused this new concession ticket policy to make me miss a train (yes, I tend to cut it a little fine – see the quote in this Freakonomics post for a defence).

The point of the initiative is to cut down on the number of commuters illicitly travelling on a concession fare – i.e. those who should be paying full price. I have a couple of comments about this:

  • I’d love to see the data on how big this problem actually is – my gut feeling is there can’t be all that many people cheating the system, if only because doing so would threaten their self-image as an honest, upright citizen.
  • Failing to produce a concession card when travelling on a concession ticket already carries the same fine as travelling without a ticket, so the people who are doing so will continue only if they are fairly confident of not having their ticket checked by a guard. Increasing the number of ticket checks would help to diminish the problem and carry the spillover benefit of decreasing other offences such as graffiti, alcohol consumption, and anti-social behaviour.
  • The benefits of this policy must be pretty slim, particularly when weighed against the costs to consumers in terms of extra inconvenience. There’s no way Sydney Trains could completely stop people buying concession tickets from machines, as the resulting gridlock at the ticket window would cause chaos – plus it would necessitate a bunch of extra staff being rostered just to meet the demand for ticket sales during the morning peak period. Yet this is exactly the period when the highest volume of travel is done – therefore most commuters are just as capable of buying concession tickets to which they aren’t entitled as before the policy.

In short, this is a silly policy that should be scrapped and replaced with something better, like greater presence of officials on trains to check tickets and quell anti-social behaviour.

Steam sales and discount rates

Bought 'Civ  V: Brave New World' on Steam recentlyI usually labour under the happy illusion that I am among the subset of the population with low discount rates – a trait that is linked to education. A recent experience belied this belief, however – my purchase patterns in the current sales on Steam.

I’m a big fan of the Civilization series of games – I spent many a happy Saturday morning playing Civ II, content in the knowledge that it would be hours before my parents awoke to kick me off the computer. The current iteration of the game, Civ V, is an amazing piece of work – grand strategy at its finest. I intend to write a post on it and other games in the near future, so watch this space.

Anyway, the second expansion pack for Civ V came out a few months ago, and as much as I wanted to jump on board straight away, it was fairly expensive and also I was still writing my thesis. So I waited.

Thesis done, the Steam autumn sale started last week, and lo and behold – the game was on sale! 50% off, what a bargain! One downside, though – popular games like that usually get marked down pretty heavily, so there was the possibility that it would become even cheaper as the sale period continued. After a few moments’ reflection, I decided to get on board and take the half-price offer. That was Friday.

True to Murphy’s law, though, this morning I discovered the game’s price had dropped further to 66% off. The disinclination to wait a few days cost me 16% in extra savings 🙁

So, exam question for you all: given those figures, what is my implied annualised discount rate? For bonus marks, consider imperfect foresight over sale price trajectories.