Economist Felix Salmon, recently posted an interesting article on the why playing the lottery can be a rational act, despite despite the negative expected payout. In the article, Salmon refers to an academic paper that “presents a theory of lottery tickets … as valuable inputs in creating a sense of open-ended possibility, specifically the possibility of escaping one’s current life by acquiring great wealth.”
Felix Salmon observes “People don’t invest the money they spend on lottery tickets. They spend it, and get those transforming fantasies in return” . He quotes a commenter on his blog saying “Personally, I can afford a dollar (or equivalent) every now and then to keep the dream of international playboyery alive”, and the author of a recent news article on the topic saying “Like a throwaway lifestyle magazine, lottery tickets engage transforming fantasies: a wine cellar, a pool, a vision of tropical blues and white sand.”
The parallels with trading are obvious. Even though the distribution of returns is less extreme than with the lottery, playing the markets has a negative payout for most retail investors. This leads me to wonder about how many trades might be of the lottery ticket variety, ie with an expected negative return, but the possibility of transformed lives if they come good (eg: the hopeful ‘tenbagger’).
Here’s a relevant quote from “Dumb and Dumber”:
Lloyd: What are the chances of a guy like you and a girl like me… ending up together?
Mary: Well, that’s pretty difficult to say.
Lloyd: Hit me with it! I’ve come a long way to see you, Mary. The least you can do is level with me. What are my chances?
Mary: Not good.
Lloyd: You mean, not good like one out of a hundred?
Mary: I’d say more like one out of a million.
Lloyd: So you’re telling me there’s a chance.