Wednesday, July 23, 2008

Investing in Fantasies

missingpoints classic: Investing in Fantasies
26 March 2003

Seeing a great number of people lining up for Lotto tickets got me thinking. Why do they bother to plunk down money for the infinitesimal chance of winning millions? It really doesn't make sense if you look at the statistics, which will tell you that you have one in five million chances to win. You stand a greater chance of winning P10,000 playing Bingo at the mall since you're only playing against the other people in the room (and one of you is assured of winning). Yet people still line up for Lotto or Jueteng or Masiao.

From an investment perspective, playing poker or betting on horses (or other sports) is more lucrative as you have some sort of control over the outcome. Poker (or tong-its or pusoy dos) is dependent not only on luck but also on skill. In other betting games, the chances are determined by statistics and past wins. More importantly, in other games of skill and chance, you are assured that someone will win and that someone could be you.

In Lotto there is no such assurance; weeks could go by with no one hitting the jackpot. So why do people bother?

Let's take the cue from our ancient brethren and look to the stars for answers. Asteroids abound in space and there exists chances that an asteroid will enter our atmosphere and collide with us. In fact, science textbooks will tell you that asteroids hit our planet everyday but that these are the size of dust particles and burn up before reaching the ground. Those that do reach the ground are too small to be of any great consequence.

Great, how about "planet killers" like those shown in the movies? Will an asteroid large enough to cause massive destruction ever have a chance of hitting us? Like in Lotto, the chances are small, perhaps even smaller that one in five million. And just like in Lotto, there is also the chance that no asteroid would ever hit us in our lifetime.

But that doesn't stop governments from spending huge amounts of money on projects to monitor these asteroids. It makes some people ask why people even bother. If the chances are small, then we go with the Lotto argument.

The key here is consequence: what follows after. The consequences of a large enough asteroid hitting us are enormous and are well worth the investment in observatories and tracking stations (it also gives astronomers practical jobs). If we could see it coming, then we could probably do something to stop it or blunt its effects. Either way, it's better than dying in our sleep.

Winning 100 million in Lotto is also enormous and may be considered a worthy investment by a lot. Imagine how an amount like that can change the life of a minimum wage earner. The consequences of betting are potentially enormous and it is what the bettors are hoping for.

Call it investing in fantasy. Asteroid research makes sure that we stave off our worst nightmares while betting on Lotto gives us a slightly better chance of achieving our dreams.

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