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Chapter 11. Get Rich Quick

Financial theory has evolved under the assumption that people are risk-averse. That is, people try to avoid taking risks unless they are compensated for doing so. But this theory does not describe people's behavior in reality. People routinely take risks for which they are not, on average, rewarded. For example, gamblers at the casino are accepting risks that are not rewarded. Every game is stacked in the casino's favor. In his book Against the Gods,[1] Peter Bernstein notes that gambling is drawing more people than baseball parks or movie theaters. So if gambling is a losing game, why do so many people gamble?

Many people gamble occasionally for entertainment. They know that they will lose, on average, but that is considered the price of the entertainment. Others gamble because they have aspirations in life that they think they are unlikely to achieve in any other way. The state lotteries are a good example. Consider that the lotteries pay out winnings of only $0.49 for every dollar paid in, or rather, participants lose 51% of their money when they play. So why do so many people play? Perhaps, it is because it offers people the only hope of attaining their dreams.[2] Indeed, poor people are over-represented among lottery players. The poor also spend more of their money on the lottery. For example, one study found that adults with incomes under $10,000 spend an average of $380 per year on the lottery.[3]


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