Contestants, Taxes, Paradoxes and Sure Things

John Allen Paulos in his Who’s Counting column at ABC News:

Bigjap_1What’s important is the “utility” to you of the dollars you receive, and their utility drops off, often logarithmically, as you receive more of them. Gaining or losing $1 million means much more to most people than it does to Warren Buffett or Bill Gates. People consider not the dollar amount at stake in any investment or game, but the utility of the dollar amount for them.

Note that the declining average utility of money provides part of the rationale for progressive taxation and higher tax rates on greater wealth.

A less weighty illustration than progressive taxation is provided by a recent British study of the show “Who Wants To Be a Millionaire.” It confirms that contestants behave as considerations of utility would suggest. Once they’ve reached a high rung on the winnings ladder, they more often quit while ahead rather than risk falling to a much lower level.

More here.