A Risk-Averse Generation

My good friend Cheerful Charlie had a summer job opportunity, I told the third and fourth graders recently. He could choose four different payment plans, which could lead to different amounts of cash for his eight-week period of employment. Plans A and B would give him a fixed amount of money; Plans C and D involved some element of chance. Students were asked to study the plans, do some calculations, and write a letter to advise Cheerful of his best strategy.

Most of the children recognized that plans C and D might bring in a lot of money. With luck, Cheerful could make over $1700 on Plan C--and a whopping $2400 with Plan D. By comparison, Plan B, the better of the two "fixed" plans, would earn Cheerful just $1275.

But almost unanimously, the letters warned Cheerful away from C and D. In most cases, it was a gut feeling that having a guaranteed income was better than taking a chance. "Plans C and D are a bit too random," wrote one girl. "If you take C or D you're taking a risk," noted a boy. "Plan C is a gamble," explained a third grader, "because it's a different amount each time."

A few children went a bit further by determining the probabilities for each plan. "In Plan C you only have a 2/8 chance to get [the best possible result]," wrote one. A classmate calculated, correctly, that Cheerful's expected income for Plan C was just $650. Plan D, which involved a fair coin and the possibility of earning either $300 or $0 for the week, was not much better. "Tails is not luckier than heads," one student admonished Cheerful. Another cautioned him not to be seduced by the possible $300 weekly payouts. "You're thinking, go for Plan D," he wrote. "Don't! You could end up getting zero dollars!"

It'll be interesting to see if this risk aversion lasts. The popularity of casinos and lotteries demonstrates that many Americans are eager to Plan-C-and-D themselves to easy riches. As someone who thinks of state lotteries as a tax on the mathematically unaware, I'm pleased that our students were so clear about the drawbacks to this approach. Of course, all bets may be off when these guys are old enough to take a trip to Foxwoods or Atlantic City...