试听180秒012：Why Investing Is Different From the Lottery?

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Hello, Himalaya subscribers. My name is Timothy Taylor.

Today we're going to discuss why investing is completely different from the lottery. A friend of mine back in college a long time ago used to have a saying about lotteries. He said, if you buy one lottery ticket, it’s just for fun. If you buy one hundred lottery tickets, it's an investment. Was my friend right?

After all, when doing financial investments in stocks and bonds, you are facing an element of risk, but also hoping for an expected return. You could say that in a lottery or in gambling, there is also an element of risk， but you're also hoping for an expected return.

In this lecture, I want to explain why a lottery is usually quite different from financial investment. We'll talk about this topic in three areas. First of all, how does the lottery work behind the scenes? Second, what are the main reasons that lottery is not a form of financial investment? And third, how can you spot those particular situations we're investing can start to look a lot like a lottery.

Let's start off with the first point. How does the lottery work? Well, countries all over the world have lotteries, and China is no exception. In China, there are two main lotteries,the China sports lottery and the China welfare lottery. In the China sports lottery, there are some games where you can bet on certain random numbers that are going to be chosen, and others where you can bet on sports events, like European football games. In the China welfare lottery, there's a wide range of different games, like 3D lottery or double color ball.

Let's start off with the idea that there is a total amount of money that is bet on the lottery. Some of that money is used for prizes, but some of it is also used to support other purposes. For example, the China sports lottery gives money to sports facilities, sports equipment, and various ways ofen couraging sports participation at all levels through the country. It also gives some money to education, health care, and other social causes. The China welfare lottery gives some funds for purposes like supporting the elderly, the disabled, and those who are vulnerable in one way or another.

Now, there's no secret that some of the money is used in this way,and the cause is funded by these lotteries are worthy and useful. But when thinking about how the lottery is different from a financial investment,there's a basic fact of arithmetic here. The amount paid out in prizes, buy lotteries is less than the total amount that his bet. Because some of the moneyis going to other causes. On average, as a result, a lottery player will lose money over time.

Now, this is the same way that lotteries work everywhere. Part of the purpose of a lottery is to raise money for other purposes. In the United States, there's no national lottery, but most separate US states run lotteries,and often the smaller states group together to form a bigger lottery that can offer bigger prizes. And the states take some of that money and spend it on various purposes. There's also, I think, some interesting history here in the United States. Way back in the history of the United States before the US evenbecame a separate country, back in the early in middle 1700s, there were many local lotteries. They were often a way of raising money for a specific purpose,often for the cost of building, a brand new building in a city probably, or sometimes for other purposes. Great universities like Harvard University, Yale University and Princeton University used lotteries long ago to help raise money for their own buildings. But there was concern back in the early 1800s in the United States that the lotteries were not always fairly run. Some might not bepaying the prizes they had promised, and some groups of citizens thought the government should not be involved in supporting gambling.

So lotteries pretty much disappeared in the United States in the middle of the 1800s, and didn't return for about a hundred years until the1960ss and 1970s. They've gradually increased in popularity since then, and the US also has some other kinds of gambling, like betting on sports or casinogames.

So let's move to our second subject. Why is a lottery fundamentally different from financial investment? To answer this question, let's go back toa couple of the ideas from the previous lecture on how to think about investments, the ideas of return and risk.

Gambling, on average, has a negative return. Investing doesn't meana negative return. If the stock market goes up, you can have gains for everyoneover a long period of time. If the price of housing gradually goes up overtime, there can be gains for everyone. Financial investing can be win-win. Butpart of the purpose of a lottery is to raise money for other reasons. And so, onaverage, the players in a lottery game will lose.

When talking about risk in the previous lecture, we talked about the difference between being risk averse when you would need to have a high erexpected return to encourage you to take some risk, or being risk neutral when you only care about the average return and don't care about the level of riskone way or the other. Well, gambling is a risk loving activity. You're takingon additional risk voluntarily. When you put your money in a bank account, you can pretty much guarantee you don't lose your money, and you probably get a smallgain. But when you play the lottery, on average, you lose money. So why do it?

Well, at the simplest level, a little bit of risk loving can be fun.You might not want to try extreme risk, like, say, putting on a parachute and jumping out of an airplane. But a little risk can be kind of fun. Many lottery games, after all, have some small probability of a very large gain that could happen in a very short time. It's fun to talk about what might happen. It's fun to dream a little bit. Another difference is that lotteries have a fairly short time horizon before the result is announced. Depending on the lottery gain, you might know almost immediately whether you win or lose, or could be maybe a few days or weeks. Financial investments for retirement or buying real estate can stretch over years or even decades.

So gambling on the lottery is different from financial investing inseveral ways. Gambling has an expected loss. Investing has an expected gain. Lotteries are risk seeking, while investing is usually risk averse. And lotteries have a short term time horizon, while financial investing is typically long term. So let's move to our third point. In what situations does financial investing begin to look a little bit like playing the lottery? As one example, Think about investing in a crypto currency like Bitcoin. In fall 2017,the price of a Bitcoin rose from about twenty thousand yuan to about one hundred thousand yuan in just a few months.

Then in early 2018, the price of a Bitcoin fell from one hundred thousand yuan to about fifty thousand yuan in about two months. Or think about investing in gold. The price of gold on the world market doubled from 2008 to 2017, but then it dropped by about one third from 2012 to 2015. This kind of pattern starts to look a lot like gambling. Whether you gain or lose is determined by when you jump in or jump out of the market.

It's possible for everyone to lose for sustained periods of time. Itcan be risk loving, it can be exciting, there can be the possibility of big gains, but that's like playing the lottery rather than financial investment. Even more regular investments can sometimes seem like they are chancy like a lottery. You can think of situations in China and around the world where stock prices fall for a time or real estate prices fall for a time. How can we think about how to distinguish when a financial investment makes sense from thinking about risk, expected return, liquidity and taxes，and when the financial investment seems like playing the lottery.Well, here's one way of making the distinction.

And I need to introduce a couple of terms here. The two terms are value traders and momentum traders. What's the difference between these two categories? Let's talk about the value traders first. Imagine you have some idea in yourmind of what a financial investment is worth.

You think, say a share of stock is worth a certain amount, because you've looked carefully at the company and what it's likely to earn profits inthe future.You think buying a certain piece of property has a certainvalue, because of where it's located, how big it is, where you can get to from that location, and so on. You have an idea of the under lying value in mind. Ifyou could buy it for less than that value, it seems like a good deal. But ifthe price got higher and higher, at some point, you'd say, oh, the price seems higher than the real value, so it's not worth it anymore. A value trader triesto think about this underlying idea of value; a momentum trader just looks atthe movements in the price of the asset and watches the price go up or down.

The momentum trader tries to make money by looking at these price movements. For example, if the price starts shooting up, the momentum trader thinks, well, this is probably a good time to buy, and as it keeps going up, I'llsell it at a higher price. Or if the price is falling for a time, the momentum trader thinks, huh, this is a good time to sell, and then when it keeps falling lower, I could buy it back again at a lower price. Sometimes the momentum trader is called a noise trader, because they're sort of following the noise ofthe asset price going up or down.

Now, to understand the difference here, imagine that the price of anasset is rising fast, like a certain stock in a certain company. A valuetrader, if the price goes up, will be at least some what discouraged from buying, because the higher stock price means that stock is less likely to be a good value. However, a momentum trader, if they see this stock price going up,they'll think, oh, this is a good time to buy, because I want to ride that rising price as it goes higher and higher.

All markets have a mixture of value traders and momentum traders.The next time, the thing to worry about, if you're a financial investor, is when the momentum traders are playing a big role. Momentum trading can feed onitself. The higher price means more people want to buy, and more buying leadsto a higher price. That's how the price of bit coin or gold can zoom up soquickly. But momentum trading is sometimes called the greater fool theory. Theidea is, sure, I’m a fool for paying this much for bit coin or gold or for thisshare of stock.

But I don't mind being a fool because there's an even greater fool out there who will pay me even more for it in the future. The problem is thatat some point, the market runs out of greater fools. All of a sudden, maybe there aren't any more willing buyers. And then the cycle can go into reverse. The price of the asset can sink, and for a time, everyone can lose. So if you're thinking the price of an asset is crazy, but you're hoping for a greater fool to come along and buy it from you anyway, at an even higher price, that's the point where financial investing begins to look an awful lot like playing thelottery.

You probably know someone who tells you it's just foolish to play the lottery. It's throwing your money away. And maybe even you expect me as an economist, shake my finger at you and say, no, no, never do that. I you know, I'm not that person. Buying a few lottery tickets now and then can be fun. A little fantasy about winning isn't a bad thing. I don't buy lottery tickets myself. I would rather have fun going to a movie or going out to dinner. But I don't blame people who have fun in other ways. But it's important to remember that lottery tickets are not an investment.

And buying a lot of lottery tickets doesn't turn it into aninvestment either. If you like to buy a few lottery tickets every now and then,fine, have fun. Make contribution to some good causes, but draw a line in yourown mind. Look at financial assets. Think about whether you're having a bit of risk seeking fun, or whether you're acting like a momentum trader, just chasing the price and taking a lot of risk. Keep those two things separate in your mind.

I'm Timothy Taylor. Thank you for listening to Himalaya.