More Patient than Crags, Tides, and stars; Innumerable, Patient as the Darkness of night

There has been quite a bit of research about people who spend a significant fraction of their income buying lottery tickets. There are three main groups. The first is very poor and buys tickets erratically. When these people get some extra money, they buy tickets in games with relatively low payouts, such as instant-win games. When asked why, they point to the lack of alternatives. No financial institution wants the odd $5 or $10 these people come across. They often live in neighborhoods or social situations where spare cash is likely to be stolen or borrowed and not repaid. A $500 lottery win is enough money to possibly protect and take advantage of in some way. Before state lotteries, these people would play either bingo or illegal numbers.

The next group is made up of older working members of the lower middle class, who report feeling trapped and frustrated. These people typically spend regular amounts-say, $10 per day-on the highestpayout games they can find. Any intermediate prizes are used to buy more tickets. While the odds of winning a million dollars or more are very low, if you do this consistently for a long period of time, the odds are not astronomical. You must have far more patience than most economists-in Carl Sandburg's words, you must be "more patient than crags, tides, and stars; innumerable, patient as the darkness of night." You must even have more patience than the life insurance beneficiary waiting for a changed life, freed from social, marital, and financial burdens; at least she knows she will probably collect on her ticket. These people emphasize that they feel they have no other hope of achieving basic middle-class goals like sending children to college or enjoying a financially secure retirement. They feel that lesser amounts saved for these goals will be eroded away or taken.

The final group is younger people who have suffered significant financial reverses due to job loss, illness, divorce, or lawsuit. These people are often deeply in debt. They play regularly and look for intermediate payouts. They are hoping to win $25,000 or $50,000 to regain their former status. If they fail, it appears they will sink down into bankruptcy.

All three of these cases make perfect sense to me. The people may not be correct in their perceptions, but they are not irrational. The lottery gives hope, which is valuable in itself, and appears to be more than competitive with the financial services they are offered. A kinder world would help people pull themselves out of poverty, attain basic middle-class goals, and regain their former positions in life after bad luck. Instead, we live in a world that criticizes the lottery players, while taking over half their ticket money for the state government and 28 percent of any winnings on top of that for the federal government (plus additional state and local taxes).

How about the casino gambler? The lottery player may have only one chance in a million of winning, but she wins big if she wins. After 5,000 spins of the roulette wheel, the chance of being ahead even by $1 is much less than one in a million million. To understand the casino gambler, you have to recall that a casino in a competitive market will repay about 75 percent of the gambler's losses. Small-time slots players take this in the form of casino overhead and coupons; some high rollers take it in luxury comps; others take it in credit (there's a casino management saying that you have to win the money twice, once at the table, then again by collecting the debt). I know economists who think the 33 percent markup on the entertainment ($100 of losses buys $75 of comps or other services) is irrational, which they'll tell you while spending $5 in a bar to buy a bottle of beer that costs $1 in the supermarket and $0.05 to make. For some reason, the house edge in a casino, 75 percent of which is returned to the player, makes gambling irrational-while every other business with a markup is just normal economics.

For the small-time players, the casino seems to serve for entertainment and social gathering. For the high rollers who like lavish entertainment, a casino weekend is a splurge. They could get the same rooms, food, drink, and entertainment cheaper, but the casino also offers the entertainment of the gambling and better service than most resorts. Plus it's more fun to live it up when the cost is indirect. Many people could not enjoy a $200 dinner, $500 show ticket, $1,000 bottle of wine, or $3,000 hotel room, because they would think about the cost and kill the pleasure. But the same things offered as comps in reward for losses suffered months before give enjoyment without regret, and the open-handed friendliness of the casino staff contrasts with the intimidating snobby rudeness affected by some sellers of luxury goods.

For the credit high rollers, the casino offers a form of investment. They'll lose over their lifetimes, but whatever bad luck comes their way, they might be able to find a welcoming casino offering them credit, as Slick did. Casino losses are by no means a secure investment, but for some people they're more secure than a bank account or a safe deposit box.

In all these cases, I think people turn to gambling because other businesses, particularly financial services businesses, have failed to meet their needs. I don't think they have compulsions to gamble; I think they find gambling a rational choice in their circumstances. I don't say it's always, or even often, a wise choice. But there are straightforward reasons for it-it's not a form of mental illness.

This book is not about that type of gambling-trying to squeeze a small amount of hope out of a basically hopeless situation or gambling for entertainment. I'm interested in solid economic reasons for taking risk-the reasons people play poker as opposed to the reasons people buy lottery tickets or play casino games.

Why would someone take risk without getting compensated by increased expected value? One such occasion is when that risk operates in the opposite direction of your larger risks. If your country's government is unstable, for example, holding gold coins could be a good idea. The price of gold goes up and down, but if the country collapses into anarchy you may find that all your other assets are worthless, at which time the gold coins will skyrocket in value.

Another reason familiar to sports fans is that you take risk when you're behind. The team that's ahead in a football game is content to call low-risk running plays, but the team that's behind will fling long passes down the field. In business, well-run companies act as if they are always behind. There's somebody out there-maybe a competitor, maybe two gals in a garage, maybe a shop with one-tenth your costs in another country, or maybe someone you cannot imagine who has an edge on you. Low-risk business strategies fail routinely.

Risk also attracts, motivates, and creates opportunities for the best people. Suppose you just landed in a strange country where you did not know the language or have maps. You do have 550 men, but they're not really under your command. You sort of hijacked the expedition, and the guy who organized it has sent an army of 1,400 men after you. Meanwhile, you're facing one of the greatest empires on earth, with 240,000 fighting men. You'd like to conquer them.

In this situation, of course, you keep maximum strategic flexibility and look for ways to reduce your risk. Unless your name is Hernando Cortes. In that case, you burn your boats. Why? Because things seemed too easy with all your resources? Because you were cold? No, because it eliminates dissension and focuses everyone on the main goal. No doubt hundreds of conquistador wannabes ordered boats burned and were laughed at or killed by their men. Others probably were pushed back to the beach and regretted bitterly the loss of the option to retreat. But the assumption of extra risk worked for Cortes, and in less dramatic ways for many others.

Another person who loves risk is an option owner. The value of an option increases with the volatility of the underlying security. Modern finance teaches that most of the valuable assets of a business are options. Not the paper securities that trade on exchanges and over the counter, but real options. When a business tries a new idea, most of the value comes from the option to expand if it is successful. The riskier the idea, for the same expected value of first-order success, the more valuable the option to expand.

For example, suppose a movie studio is faced with two proposed movies; each will cost $100 million to make. The first one is a standard genre picture that will make between $100 and $140 million, with an expected value of $120 million. The other is an offbeat new idea that could make between $0 and $240 million, with the same $120 million expected value. Both have the same 20 percent expected return, but the standard movie has less risk. However, the new idea has lots of follow-on benefits. It will appeal to people who don't go to other movies, who may form a valuable new core audience. It will attract energetic and talented people to the studio. It can generate new good ideas and valuable information about how to manage them. All of those happen even if the movie fails financially. If it succeeds, it could create a new genre and other opportunities. A related concept is the option to abandon. Let's say that 20 percent of the way through the filming you will learn how much the movie will make. That's useless with the standard picture-it always makes at least its cost, so you wouldn't abandon it regardless of the information you got. But with the new idea, you can increase your expected return from 20 percent to 32.5 percent by abandoning failures early.

When people are faced with a lot of options, as in the nineteenthcentury United States, taking risk just makes sense. If there is literal gold in them thar hills, or figurative gold in new technology, the more risk, the better. If you win, great. If you lose, you pick up the next option. That's gambling, and it's not a problem.

Дата добавления: 2015-10-26