What goes to Vegas doesn’t necessarily stay in Vegas
Posted by metaphorical on 25 March 2007
My regular rock climbing partner, M., won’t be climbing this weekend. His wife wants to go to Atlantic City to, in his words, “blow $100 in quarters.”
I said to M, “You both love the movies. For the same $100 you could come to Manhattan, see two movies, and have a nice dinner in between.” I know the Ms don’t have a lot of money, so the Atlantic City trip was even more puzzling than it might have been for another couple.
Moreover, humans as a species are generally risk-averse. If fact, studies show that people, on average, need nearly 2x return on a wager to accept it, as a very nice write-up, here, of some recent research shows.
In other words, the average person will turn down a 50-50 bet, such as a coin flip, even if they’re offered $75 if they win against a $50 loss if they lose. To pass up an investment with a 50 percent rate of return is a somewhat irrational level of risk aversion.
Yet every year, millions of people vacation in Las Vegas, and gamble away billions. My friend K., who was a Sloane management Fellow at MIT and has been a project manager for some very big, important projects has favorite rant that’s relevant.
“Do you like to bet at casinos?” she asks. “Okay, I can save you the trouble. Hand me a dollar. Okay, good. Now hold out your hand.” She then hands the person 97 cents. “Wasn’t that fun?” she asks. “Want to go again?” (This is a very funny routine, when you get to see the stunned look on the other person’s face.)
Some people, the new research argues, aren’t so risk averse. MRI studies suggest that their sense of reward is dulled, compared to other people, but so is their sense of risk. Rock climbers might fall in that category, the researchers argue. But it seems a lot of people aren’t risk averse.
Today’s NY Times Real Estate section has an article, “The Danger in the Fine Print,” about people who buy condos in New York before construction on the apartment building is complete. Then, buyer “are sometimes in for very big surprises, some of them infuriating.”
Rooms are often smaller than advertised. The Viking stove isn’t there, but a stove described as being of “similar quality” is. The view is not at all what the buyers imagined.
Were they deceived?
Not necessarily. In many cases, neither they nor their lawyers read the offering plan carefully.
The article describes a couple who were more than infuriated.
Margery Germain said neither she nor her husband, Mark, noticed the fine print in the offering plan explaining that although their Chelsea apartment had been marketed at 1,500 square feet, it really wouldn’t be that big because the figure measured the space to the unit’s exterior walls and included space that they could neither see nor use.
Mrs. Germain walked through the building for the first time last September, she said, and was devastated when she stepped into the space that would be her two-bedroom apartment: “I was horrified. I ran out and called my husband and said: ‘It’s tiny. What are we going to do?’ Compared with the floor plan we had been given, every room had lost some square footage. It wasn’t what we expected.”
The Germains were lucky; the fine print worked for them as well as against them. An escape clause “allowed them to walk away from the deal and get their deposit back because the building was not ready for occupancy when it was supposed to be, by the end of 2006.”
The Germains, who are empty nesters looking forward to downsizing from their home in Scarsdale, N.Y., and moving into the city, decided that buying from a floor plan wasn’t for them. They have since signed a contract for a loft at the Tribeca Summit, a converted warehouse that is not yet completed. “But we’ve seen the space,” Mrs. Germain said, “and we know what we’re getting this time.”
Clearly, this is not a couple that are risk-averse. So is that what’s going on? Lots of people, including Ms M, and millions of Atlantic City and Las Vegas vacationers, aren’t risk-averse?
I don’t think that’s true. In fact, they’re at least as risk-averse as anyone, is my guess. They take these vacations because of an entirely different calculation from the one that K enacts. And it’s a calculation that’s so rational that it’s almost hard to see why you’d want to take a vacation anywhere else. M put his finger on it himself. He said of his wife, “She thinks she’s going to come back with money.”
That’s the calculation in a nutshell. A person sets aside $100, or $600, or $1600 dollars, for a vacation. They’re going to spend that no matter what. If they go to dinner and a movie, the money is gone. If they go to Hawaii or the Grand Canyon or Paris, the money is gone. If they to Las Vegas, they might come back with $100, or $5100 in their pocket. The odds are low, but they’re higher than zero.
Vegas knows this, of course, and they do everything they can to make this calculation come out right. In the same way that a cruise vacation or a package tour is very predictable—remember, people are risk-averse!—with all expenses accounted for except for time spent in gift shops, the Vegas vacationer knows what the hotel will cost. Food is so cheap as to be negligible—about $10, tip included, will buy you a breakfast that will last until your $19 all-you-can-eat buffet dinner. Everything else is just walking around the strip, seeing the sights, and deciding which casino’s slots to drop those quarters into.
Why do people take other vacations? Because they want to actually see Paris, swim in the Hawaiian sea, or the take in the Grand Canyon and maybe even hike it. But there’s a large group of people for whom a large number of vacations are interchangeable. Cruises to nowhere. Florida beaches with open bars. And Las Vegas. Only one holds out hope of being free.