Gambling Is Not a Retirement Plan

https://www.bloomberg.com/opinion/articles/2020-06-02/gambling-is-not-a-retirement-plan

by feross • 6 years ago

74 61 6 years ago

airstrike3• 6 years ago

You beat me to it, but perhaps that's for the better – I tried to submit with the title "Matt Levine on George Floyd Protests" which to me is a more accurate description of the first piece which seemed quite thought provoking.

Editorializing, maybe, but I'd say pertinent too.

dsalzman• 6 years ago

Podcast link - https://anchor.fm/talking-money-stuff/episodes/Gambling-Is-N...

rowawey• 6 years ago

A wealth researcher, the late Thomas J. Stanley, found that the biggest single correlating behavior to wealth was not purchasing of lottery tickets. This makes sense because of external locus-of-control (lack of agency), self-control, lack of goal-setting/planning, and magical/wishful thinking.

Furthermore, other researchers found delayed gratification social experiments with children involving more rewards later discovered those children who waited for more rewards later were wealthier later in life. [0](Economic background was found to be just as influential in later studies.)

Gambling (risking money with an expectation less than zero), in all forms, is a losing behavior. It doesn't matter if its lottery tickets, slot machines, three card monte, or financial instruments (without data).

0. https://en.wikipedia.org/wiki/Stanford_marshmallow_experimen...

Klinky6• 6 years ago

Sounds incredibly simplistic. You have to assume everyone starts from the same spot and has equal opportunities, which is definitely not true. External locus-of-control may very well be an accurate assessment. There are probably people who are also "dumb", but even those are likely a product of their environment.

So really the solution isn't "don't buy lottery tickets", it's "solve systemic issues that lead to poor goal planning and wishful thinking, rather than goal planning and realistic thinking with achievable goals that result in better quality of life". That is a lot harder than just calling lotto players stupid.

tajd2• 6 years ago

Not buying lottery tickets seems like a good place to start though.

mywittyname• 6 years ago

It's possible to correct for socio-economic conditions. In fact, it's somewhat silly to run an experiment like this without correcting for that.

asdfman123• 6 years ago

I don't think they claim there's causation, but instead just correlation. Correlation between ideas about finances and monetary outcomes.

machinehermit• 6 years ago

You don't see the flaw in this line of thinking that if you solved what you suggest you just raise the bar and are left with exactly the same problem?

danaris• 6 years ago

IIRC, further research has strongly suggested that economic background was not only "just as influential" in later wealth, but that it predicted which children would take the marshmallow.

Which makes sense: If you have grown up knowing that you're not likely to get a promised reward later (because it's never within reach, financially, or because the kinds of things that make it cost so much money to be poor keep coming up), yeah, you're going to take a treat when it's available.

loufe• 6 years ago

Exactly, it speaks to the same point about overeating my parents brought up when I was young. A lot of families, without questioning it, continue the practice of pressuring children to eat every last scrap on their plate instead of stopping when they're full, which was implemented when their parents or grandparents were dirt poor and the next meal was not a given. That has got to have some strong impacts and the reward and planning centres of the brain in profound ways.

shoo• 6 years ago

Tangentially related book recommendation, not about gambling, but about development economics: "Poor Economics" -- by Abhijit Banerjee and Esther Duflo

https://en.m.wikipedia.org/wiki/Poor_Economics

RcouF1uZ4gsC• 6 years ago

I have long argued that the most important lesson of “financial literacy,” one that is never taught in any “financial literacy” classes, is: If I offer you a 20% annual risk-free return, am I lying? The answer is yes, of course. UBS was not actually offering a 20% annual risk-free return—the ETN “often yielded 20% or more” but didn’t advertise any fixed interest rate, and it said right on the front page that it was risky—but just knowing that single core fact of financial literacy would be sufficient to guide your investment decision here. “Ooh fun gamble, 20% return, maybe I’ll take a chance on it”: Fine, great, whatever. “Hmm this seems to offer monthly income, and a 20% return would help my retirement, guess I should put all my savings into it”: No, bad, wrong.

Brilliant! So much misery would be avoided if people could be taught that simple rule.

FabHK2• 6 years ago

Yes. It is time dependent, of course - you could get 11% on German Bundesanleihen in the early 80s. Having said that, Levine’s rule is sound.

shuckles• 6 years ago

Works if you replace yield with spread, which is the standard convention in finance anyways.

nradov• 6 years ago

At the time there was a very real risk that a Soviet invasion could wipe out your investment.

Melting_Harps• 6 years ago

Brilliant! So much misery would be avoided if people could be taught that simple rule.

Isn't that not being understood by even the wealthy elite a precursor for a Bernie Madoff? I think 'financial literacy' is an unobtainable panacea when most, even supposed economists, don't have much more than of an insight as to what Money actually is and will simply often repeat what was forced fed to them in school about fiat.

The truth is the concept of Money has evolved so much in just the last 10 years, that PhDs and Masters thesis written on topics just 5 years ago are some what moot when seen in this light.

As for the notion of a 20% risk-free return is concerned, I think the same adage applies: a fool and his money are soon parted. Just because the person selling you these products wear suits and sit in a bank doesn't mean he isn't a predatory con-artist that is so typical on every street corner.

They just legitimize their largess with nice decor, lawyers and lobbyists, but that's about the only difference.

But just to be clear, as much as I blame bankers for the financial crisis of 2008 that heavily impacted me despite no actual fault other than being born in the 80s, and these instruments that essentially rob innocent people, I'm also entirely unsympathetic to this occurring:

It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny.

Why would you wager your entire retirement on a risky bet instead of cashing out your profits, and MAYBE letting your initial investment (essentially house money) ride in this risky instrument to see potential benefits? Maybe I've become immune to the scams and charlatans with ICOs and alt coin pump-dump scams after 9 years in the Cryptocurrency space, but I'm also well adapted enough as Human being to know that common sense has to prevail when it comes to matters of finance.

As an experiment to that end, I occasionally go on WSB just to see how infectious vacuous exuberance is still so rampant post-2008 and it often leads to the same predictable outcome.

ouid3• 6 years ago

basically all of financial literacy is the judicious application of the zero arbitrage principle.

Nemo_bis3• 6 years ago

Sadly, people misunderstand this basic reasoning and think it applies the other way too: if something offers a low return, then it must be safe. Thousands of retail investors in Italy lost all their money in high-risk bonds sold by their banks which offered a low yield. https://www.reuters.com/article/italy-banks-bonds-idUSL8N149...

mshron2• 6 years ago

(I assume this is posted because of the preamble on legal realism and George Floyd, which I'm addressing.)

I just finished _Team of Rivals_, an excellent history of Lincoln and the Civil War. Specifically, the political and administrative side of the war, with a lot less focus on the military aspects.

Something that really popped out at me from the book is how often public opinion is in a feedback loop with the law. Both the formal bits and the realist bits.

I think Levine is right when he says that the law is, more-or-less, what the people with tear gas do. But what the people with tear gas can get away with is partly determined by where public opinion is. And even if the laws about restricting police and military actions are often worthless, other laws matter. Like budgets, and procurement rules. Police can't fire tear gas if they can't buy it.

There's no shortcut, but not all is hopeless. Don't give up.

sillysaurusx• 6 years ago

But what the people with tear gas can get away with is partly determined by where public opinion is. And even if the laws about restricting police and military actions are often worthless, other laws matter. Like budgets, and procurement rules. Police can't fire tear gas if they can't buy it.

The logic here goes something like: The citizens are unhappy -> The unhappiness translates into different politicians -> Those politicians will de-fund what made the citizens unhappy.

That logic only works if you take politicians at their word. But politics is a sticky thing. It seems a game of musical chairs, where the last one sitting is voted out, but the rest are sitting pretty. And there are so many chairs to fill.

To be blunt: We don't have power. And the protests are merely a reflection of that fact. Why would the politicians do anything but tell us what we want to hear, and then continue to do the same things? There's no benefit, political or otherwise, in giving us what we want.

https://www.youtube.com/watch?v=rStL7niR7gs is a nice refresher on some of the issues.

bluGill• 6 years ago

Because you vote them out. The nra is powerful because they have voted people out.

The truth is most people don't really care about what they say they care about, so politicians can get away with not doing as they say. They are careful to do what they say when they have reason to believe voters actually care.

This week, without riots we cn get police reform through because they are afraid if they don't will remember and vote them out. Next week if we forget they won't. There is a reasonable conspiracy theory that the riots are sponsored by those who want police reforms to fail, but making the police the good guys (better than the increasing mob riot) laws won't pass. Might be unfounded, but it is reasonable.

mshron2• 6 years ago

That's one causal path, but I don't think it's the only one.

Crises can also lead to pressure on politicians, who pass laws that have an impact even after the crisis is over, sometimes even good ones. The PATRIOT Act isn't the only bill quickly passed out of fear.

Consider the 1968 Fair Housing Act, which ended redlining, and made it through partly out of fear of further rioting after MLK's assassination. That's a big deal, even if no politicians were voted out.

tick_tock_tick• 6 years ago

All the major cities that are having these issues are 1 party cities that enjoy their citizen duly re-electing them time and time and not getting anything they promised.

I think the two party system at the nation level is bad but nothing compared to how all major US cities are 1 party cites. Why change anything when the status quo keeps you in power and lets you fill your pockets.

ken2• 6 years ago

My state government has adjacent billboards telling me to play the lottery (odds of winning, 1 in 7000000) on the basis that I'll be able to do really cool things with all that money, and that I should wear a mask and maintain distance from other people to stay safe from a virus (odds of contracting, 1 in 350, odds of dying, 1 in 7000).

Is it any wonder that people make poor choices? We're training them to be bad at math.

clairity2• 6 years ago

"(odds of contracting, 1 in 350, odds of dying, 1 in 7000)"

and 1 in 100 odds of dying from a car accident.

it's less about being bad at math, and more about poorly trained intuitions around risk and being consistent in response.

empath752• 6 years ago

All of those odds are nonsensical without a time frame.

Are we talking about on a trip to a grocery store, or this year, or in a life time?

Buttons840• 6 years ago

Now that we've brought up COVID and car accidents.

About 36,500 people died in car accidents in the US in 2018 [1], so about 100 people per day die from car accidents in the US.

About 1,000 people are dying per day from COVID, currently [2].

Wouldn't this mean that the odds of dying from COVID are much higher than dying from a car accident? Which would contradict the odds I'm seeing in this thread.

[1] https://en.wikipedia.org/wiki/Motor_vehicle_fatality_rate_in... [2] https://www.worldometers.info/coronavirus/country/us/

FabHK2• 6 years ago

1. Not sure where you see the bad math - your state government encourages you to do something with good (though unlikely) consequences, and encourages you to avoid something with bad (though unlikely) consequences.

2. It’s not only about you. Lottery proceeds are used for all sorts of good things. Being part of an infection chain could infect and kill many people.

3. Note that absent measures, the odds of contracting and dying would rise up enormously.

4. At any rate, that’s not what Levine’s excellent column is about.

playingchanges• 6 years ago

I’m sorry but lotteries are an evil hidden tax on the poor and uneducated. Can’t let that slide.

airstrike3• 6 years ago

you to do something with good (though unlikely) consequences

But that's not really honest, is it? It's not "with good consequences" if the expected value is decidedly negative.

ken2• 6 years ago

1. What good consequences? Lottery winners are more likely to declare bankruptcy after their win, and are no happier than they were before. It's blatant false advertising. The ads even show winners utilizing fake (CGI) technology that doesn't exist. I don't see how this is even legal, except that it's produced by the state. Drug companies are required to list every possible side effect, but lotteries can just make up anything, and ignore any possible downsides.

2. Lottery proceeds are used as an excuse for removing other sources of funding for those things. I've never heard of a case where a public good was better funded after the creation of a lottery. And the people buying lottery tickets tend to be those least able to afford it -- it's a regressive tax.

3. Yes, if you ignore the lotto advertising, the public health announcement is a good use of billboard space. It takes on a completely different meaning, though, in the context of "Ignore statistics and just think about having fun!"

4. The column seems to be about people gambling away their money on risky ventures that will not pay off. Do you not agree that this describes the state lottery?

skybrian2• 6 years ago

The entertainment value of playing the lottery is thinking about what you would do with all that money, and a billboard can encourage you to think about it that way, both enhancing its entertainment value and encouraging you to buy a ticket.

I don't think you can tell from a billboard alone how many people think of the lottery as more than just entertainment.

IvyMike• 6 years ago

odds of contracting, 1 in 350

"Why are we even bothering to fight the stove fire? Only one in 50 of my appliances has burned!"

skybrian2• 6 years ago

I think legal realism as Matt Levine states it this time is not quite right. Whether a law is meaningful depends not just on what officials do, it's about what most people do.

An example is a curfew. If the government announces a curfew and most people stay home, then this supports the curfew, and the authorities have a better chance of enforcing the curfew. If nobody obeyed it then it wouldn't work at all. (At best it would give the police a justification for selective enforcement.)

The same is true of health orders. We have seen quite a bit of cooperation, partly due to people agreeing with the general principle of wanting to avoid spreading the virus, and partially because many people will obey the law even if they don't agree with it. But, this cooperation is only partial and has seemed rather tenuous lately, due to fatigue and fairly obvious lack of enforcement.

There are different ways people obey laws. Most people outside government have fairly vague understandings of law and only follow the general principles. For the specifics of a law to matter, ultimately it depends on most people accepting the authority of the courts in settling disputes. In particular, the police accepting the courts' authority and enforcing decisions is key.

Etheryte• 6 years ago

I think another core problem that's hinted at, but not addressed directly in the article is understanding risk. Many people are fine with "this is a risky investment" without really comprehending what the risk is, or even what the ballpark of the risk is. After all, the big advertisement page says "up to N% return" and that's what matters.

Similar to financial advisor disclaimers, it should be mandatory for every investment instrument to come with a clearly visible warning: "N% of retail investors trading this asset lose money".

Risk and reward are correlated, thus it shouldn't be legal to advertise the rewards without highlighting the risk.

mcguire3• 6 years ago

"In addition to my views about financial literacy, I have argued in the past that good financial regulation would divide investments into normal ones and dumb ones. Normal ones would be, like, index funds or whatever, and anyone could buy them. Dumb ones would be penny stocks and private investments and, good lord, leveraged ETNs on mortgage REITs, and also anyone could buy them. But you’d have to get a Certificate of Dumb Investment before buying the dumb ones. I spelled out the application process once:

"To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”

"Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate. …

"If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison."

I so wish that were the procedure.

BitwiseFool• 6 years ago

Good thing I don't have to do this to buy Bitcoin.

gruez• 6 years ago

Only if you're buying in-person or similar. Any serious exchange would have mandatory checking.

Nemo_bis3• 6 years ago

It's already the case in EU, it's called MiFID II. https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir

mcguire3• 6 years ago

Including the slapping?

ouid3• 6 years ago

I disagree.

The structure of financial malfeasance in the presence of the limited liability corporation is as follows:

1) become a corporation. 2) borrow a lot of money. 3) bet it on red. 4) If lose, have the limited liability shell declare bankruptcy, no personal loss. If win, pay back the loans and dissolve the company.

There are many laws trying to prevent this exact scenario, but there is no way to characterize the pattern well enough to catch all of the instances of it. Furthermore, the incentive to find such a pattern always exists, so long as the liability limiting financial instrument (LLC) does.

The pattern is, in a modern context, streamlined through insurers. Insurers, as a rule, are businesses which lie about the applicability of the central limit theorem to investments. Insurers are only interested in increasing the number of policies that they cover. In the lie of the central limit theorem, more policies is less risk. But since a lot of risk is actually correlated, more policies is more correlated risk. Correctly identifying correlated risk is hard, in general, and furthermore, identifying correlated risk is explicitly against the insurance companies interest, as selling policies that they know they can't cover is fraud, but otherwise profitable.

missedthecue• 6 years ago

No one lends uncollateralized money to a shell corp

ouid3• 6 years ago

I think you're missing the point. This is the structure of malfeasance. It is the goal of every borrower to create a scenario which is, for lack of a better word, homomorphic to this one.

Gambling Is Not a Retirement Plan

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