During my lifetime lotteries and lawsuits have increased remarkably. On the basis of that, I predict that the investment future will hold more booms and busts than the past. Is this the ranting of a crotchety old guy? Perhaps, but let me explain.
When I was growing up there were no state lotteries. In recent years more and more states have added lotteries so that now almost every state has a lottery. I should say that I don't buy lottery tickets since one can calculate the "mathematical expectation" for each ticket which represents the reasonable value of the ticket. Since I don't like to pay $1 for anything with the value of 50 cents, I don't buy lottery tickets. I do have various concerns with lotteries but the issue I want to consider here is a psychological one. I suspect that lotteries increase the belief that one can "hit the jackpot" with no risk. When I was young there was no gambling in Atlantic City, and Las Vegas was a long way from my home in the Midwest. Now, the "gambling industry" likes to be called the "gaming industry" to suggest more fun and less risk, and there are casinos a cheap trip from wherever you are. You can gamble carefully and for fun but I assume most people hope to win it big. Does this have any effect on attitudes across the country and on average attitudes toward investing?
What has been learned about lottery design might be relevant to investment psychology. You might not remember the first lotteries but the "big prize" might have been $50,000. Lottery designers assumed that ticket buyers would be deterred by a smaller probability of winning the prize. Now lottery designers have learned that ticket buyers are oblivious to the miniscule probability of winning and are concerned only with the size of the prize (bigger is better). This has resulted in multi-state lotteries and cascade lotteries where winning one lottery results in being entered into another lottery. This results in huge prizes (good) and incredibly tiny chances to win (who cares?). In retrospect the notion that ticket buyers would be deterred by the small probability of winning seems silly; if ticket buyers paid attention to the small probability of winning, they would not buy tickets at all. The investing analog would be to focus on the chance to "win big" in the market, oblivious to the likelihood of that happening or the corresponding risk.
Now you know that various personal injury lawsuits have also become much more common. I get the sense that being in an accident is sometimes viewed as "hitting the lottery". If you are injured you have won the opportunity to sue someone. Ignore other issues and consider the psychology. Without any effort (perhaps even as a result of your own mistake) you might gain a large sum of money. Forget hard work or patient investing, you might luck into riches.
Another possible factor in the changing of average investment attitudes is the fact the generation of individuals terrified by the great depression is dying off. Many of these investors were unusually conservative, and removing them might change the overall average of investor attitudes.
It used to be said that one boom-bust cycle was sufficient for a generation. Investors would learn from one boom-bust experience and the next would occur only when a new generation, without that experience, became dominant. We have recently gone through a boom-bust cycle in the stock market. I do not know if we will soon see a bust follow the boom in real estate. But it strikes me the language is similar
If in fact the prevalence of lotteries and lawsuits indicates a changing psychology of how to gain wealth, then boom-bust cycles will become more common. One investment type or asset will follow another as investors try to "hit it big". In 35 years, someone can write whether my prediction was correct.
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