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How You Could Make £2,850 Per Month

What Every Investor Can Learn from Gamblers

Personal_Finance / Learning to Invest Nov 06, 2018 - 12:23 PM GMT

By: Steve_Marks


The past week may have been rather unpleasant for the continually sinking stock markets, but there was someone who still managed to make an awful lot of money: the as-yet-unidentified holder of a Mega Millions lottery ticket worth $1.54 billion (£1.2 billion), or around $878 million (£685 million) after tax.

The interesting point here is not that somebody won, but that there was such a scramble to buy tickets beforehand. Like that infamous episode of Friends, this highlighted an important point about human nature: people fail to have any real understanding of probability.  

So what, exactly, can you as an investor take away from this? 

The strange phenomenon of the eternal optimist

According to the statistics, Americans spent a staggering $80.5 billion (£62 million) on lottery tickets in 2016 alone. This phenomenal amount can largely be explained by society's eternal optimism, a quirk that companies and governments have been exploiting for centuries.  

It turns out that we have very little interest in actual probabilities – what we really care about is the tantalising thought of how much we could win. Whereas one might show only a mild curiosity were their odds of success to rise from one in one million to one in 100,000, their pulse would quicken if informed that the jackpot itself had gone from £100,000 to one million.

The reason behind this is simple: whereas probabilities are impersonal and abstract, the thought of money – and more importantly what we could do with it – is something far easier to picture than mere numbers on paper.  

The role of emotion 

What we can garner from this is that emotion has a huge part to play in our monetary choices. This is a sentiment backed up by a study psychologist Ellen Langer conducted in the 1970s. Offering to buy people’s lottery tickets prior to the draw, she found holders demanded four times as much in instances where they’d chosen the numbers themselves, as opposed to having them randomly assigned.

This was attributed to the element of control associated with the act of actively picking them out, a behaviour which has also been used to explain the increased likelihood of investors repurchasing stocks that they have previously sold for a gain.

The same sort of behaviour has been anecdotally observed in regular gamblers, too. Let's take sports betting as an example. As noted by experts redbet, sports betting offers fixed odds, with hundreds of sporting types and events to choose from. Despite this, those who play at online sites are likely to repeatedly bet on a horse or sports team that has delivered victory in the past, often irrespective of the odds themselves.

So what lessons can be learned? Firstly, that humans are predictable creatures: if something looks good and evokes an emotional response, the optimist in us is likely to gravitate towards it; secondly, that we frequently repeat previous patterns of behaviour.   

Embrace these teachings, use them to calculate what others will do, and then do the polar opposite, and the chances are you’ll be the one who comes out on top. 

By Steve Marks

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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