Mega Million maniacs.
“Mansions and yachts, as long as a city blocks.” This is my favourite quote from one of the Mega Millions jackpot winners when asked about what the spoils were going to be spent on. The US$1.5bn draw recently won by an anonymous South Carolinian is basically the biggest win ever of its kind, and at one point in the lead up, some US states were selling up to 600 lottery tickets per second.
So, who is buying these tickets? Mostly poor people.
Bloomberg recently reported that the lowest-income households in the U.S. on average spend $412 annually on lottery tickets, which is nearly four times the $105 a year spent by the highest-earning households.
This is also more than 40% of U.S. households have in savings; those households could not come up with $400 in an emergency - low-income Americans are spending their excess funds on a 1-in-300 million chance.
They must be crazy!
Or at least this is what a lot of the press has said. But no-one is crazy. People can be misinformed. They can have incomplete information. They can be bad at maths. They can be persuaded by very effective marketing (many of the best and brightest minds of the current generation are in Silicon Valley working on ways to distract you and show you more advertising). They can misjudge the consequences of their actions.
The decision to buy a lottery ticket – or a house, or a share or whatever – makes sense to them in that moment and checks all the boxes they need to check. Every decision everyone makes is rationalised in their head when they make it. The cornerstone of behavioural finance is that flaws in decision making apply to other people, but not ourselves. We assess others based on action, but for ourselves we use an internal dialogue that rationalises what others identify as bad decisions.
Rarely are financial decisions, especially investment decisions, made purely with a spreadsheet. They are made between people at meetings, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are tousled together into reasoning that can look crazy to others, but weaves together a narrative that works. Each time someone wants to buy a stock, someone else must want to sell it. Just try to rationalise Internet stocks in 1999, or US holiday condo’s in 2005.
The entertaining part is learning about how flawed other people can be with their investment decisions. The hard part is trying to figure out how flawed you are, and what narratives make sense to you but would seem crazy to others.
