AI Summary #
Here are the main points discussed by the host:
- The odds of winning a $1 billion lottery jackpot are extremely low, but Americans spend over $100 billion on state-run lotteries each year, which is equivalent to the revenue of the ninth-largest company in the world.
- Notably, it’s the poorest Americans who buy the most lottery tickets, with those living in the poorest 1% of zip codes spending an average of $600 per year or nearly 5% of their income on lottery tickets.
- The host emphasizes that nobody is “crazy” when making financial decisions; rather, people often make rationalizations based on incomplete information or flawed reasoning that seems sensible to them at the time.
- Examples given include low-income Americans buying lottery tickets as a way to hold onto a dream of affording luxuries they can’t currently afford, and wealthy individuals making investments like day-trading or flipping houses during bubbles due to short-term momentum.
- The host advises listeners to be cautious when taking cues from others’ financial decisions, as it’s difficult to understand their thought process. They also emphasize that everyone justifies their own actions based on poor reasoning, regardless of income level.
Key quotes:
- “Nobody is crazy; people can be misinformed, they can have incomplete information, they can be very bad at math, they can be persuaded by marketing… But nobody is crazy.”
- “The premise of this book is that it is easier to recognize other people’s mistakes than our own.”
Actionable advice:
- Be aware that financial decisions are often rationalizations based on flawed reasoning, regardless of income level.
- Approach others’ financial decisions with caution and try to understand their thought process, rather than making assumptions.
- Recognize that your own financial decision-making is subject to similar flaws and biases.
AI Transcription #
Welcome back.
If you haven’t seen, there is a billion dollar lottery jackpot.
And I just checked this morning, apparently somebody has won it.
So congratulations to the newest billionaire.
It’s one of the largest lottery jackpots in history.
And of course the odds of winning a jackpot are ridiculously low.
The math nerds apparently put the odds you will win that billion dollar jackpot at 1 in 292 million, which I checked is roughly 19,000 times less likely than being struck by lightning in your lifetime.
You’re 19,000 times more likely to be struck by lightning than win this jackpot.
But what’s astounding about lottery is when you dig into them.
That I imagine will shock a lot of people listening to this for a reason I’ll explain in a second.
Is how much money Americans spend on the lottery?
It is wild.
In 2023, Americans spent more than 100 billion dollars on state run lottery.
The economists recently pointed out that if that were a company making 100 billion dollars in revenue, it would be the ninth largest company in the world.
Some other ways to contextualize this that I thought about.
The iPhone, the most successful consumer product in history effectively, is a 200 billion dollar per year business worldwide.
While Americans spend 100 billion dollars a year on scratcher tickets on the lottery, one other way to think about this is that this billion dollar lottery ticket, just this one prize that was recently won, is more than nine states spend on their K through 12 education per year.
It’s just insane amount of money that Americans spend on lottery.
I’ve pointed this out before.
One of the most important statistics when you’re thinking about how much Americans spend on the lottery is who buy those tickets.
And overwhelmingly, it is the poorest Americans who by far spend the most on lottery.
The economists recently wrote, quote, using zip code level sales data from 24 states, we estimate that each 10% decrease in median household income is associated with a 4% increase in lottery spending.
So the poor you are, the more you spend on lottery, it’s a very clean correlation.
The economists went on to write, quote, in the poorest 1% of zip codes that have lottery retailers, the average American adult spends around $600 per year or nearly 5% of their income on lottery tickets.
That compares with just $150 or 0.15% for those in the richest 1% of zip codes.
In other words, the poorest households spend roughly 30 times more on lottery than richer ones as a share of income.
The pandemic it writes appears to have made this worse.
In 2021, the poorest 1% of households spend $100 more on lottery than they did in 2019, but the richest 1% spent just $10 more.
So put those together, the lottery is unimaginably huge and the vast majority of the people participating in it are very poor.
Some of these people who are spending on average of $600 per year on lottery tickets are the same people who say that they could not come up with $600 in a pinch to pay for a car repair or a medical bill.
Some of the lowest income Americans blowing their emergency funds on a ticket whose odds of winning are 19,000 times lower than being struck by lightning.
And it is so easy for me and for I imagine a lot of you to look at that and say, you idiots, what are you doing?
You people are crazy.
That’s always what you hear when you point out that the poorest people are the ones who buy lottery tickets.
But let me stop you right there.
I think one of the most important things to realize in behavioral findings is that no one is crazy.
People can be misinformed, they can have incomplete information, they can be very bad at math, they can be persuaded by marketing, they can have no idea what they’re doing, they can misjudge the consequences of their actions, all of those things, of course, all day long.
But nobody is crazy.
The decision to buy a lottery ticket or a meme stock or a house during a bubble, whatever it is, makes sense to that person in the moment and checks all the boxes that they need to check.
Every decision everyone makes is rationalized in their head when they make it.
And that is so important to understand when watching other people make financial decisions.
A very important part of behavioral finance is that most people assume it’s a field whose documented flaws about how we make weird decisions with money.
The assumption that those things apply to other people, but not to you.
I think that is because we judge other people solely off their actions.
But when judging ourselves, we have this internal dialogue that rationalizes the decisions that other people would identify as bad.
We rarely hear the internal justifications other people have for their mistakes.
But we are keenly aware of our own of our own internal dialogue that justifies what we’re doing.
Daniel Connamen, who of course just passed away recently, began his book by writing quote, the premise of this book is that it is easier to recognize other people’s mistakes than our own.
Now, most people listening to this podcast, I know the demographics, I have an above-average income, and assets, net worth, education, their career advancement opportunities, gone and on and on.
So it is hard for many of us listening to this to intuitively grasp the subconscious reasoning of a very low-income American buying all of these lottery tickets.
But bear with me a little bit, try to put yourself in their shoes.
And if you were to ask them the reason for buying that lottery ticket, maybe it goes something like this.
We live paycheck to paycheck, and saving money seems out of reach.
Our prospects for much higher wages seem out of reach.
We can’t afford nice vacations or new cars or health insurance or homes in a safe neighborhood.
We can’t put our kids through college without going into crazy amounts of debt.
A lot of the stuff that you listeners of this podcast either have now or have a good chance of getting, we don’t.
Buying a lottery ticket is the only times in our life when we can hold a tangible dream of getting the good stuff that you already have and take for granted.
We are paying for a dream, and you may not understand that because you are already living the dream.
That’s why we buy more lottery tickets than you do.
Now, you don’t have to agree with that reasoning.
It’s still a very bad decision to buy the lottery ticket in that situation.
I would encourage them not to, but I kind of understand why they did it, why they keep doing it.
I can kind of understand why the poorest people buy the most lottery tickets.
A lot of financial decisions are statistically wrong, but intuitively right for the person who is making them.
And look, just to show that I’m not trying to put the spotlight on the specific group of people.
I think that applies to a lot of very wealthy people as well.
Why did otherwise smart, educated, experienced people buy.com stocks in 1999?
The easy answer, the knee jerk reaction answer is because they were irrational and they were greedy.
That’s what people say.
And that was true for some of them.
But for others, I would say maybe even most of them, they didn’t actually think that Cisco was actually worth $600 billion in 1999.
They didn’t do an analysis on a spreadsheet and come up with that.
They thought that Cisco stock would go up next week.
They were day trading.
And given the momentum that preceded the dot com bubble, that was not a crazy bet.
Most investors probably rationalized what they were doing in ways that weren’t that crazy.
Even if in hindsight they turned out to be wrong.
I think it’s the same with the housing bubble of 2008.
It’s easy to look back in hindsight and say what kind of maniac crazy idiot pays a zillion dollars for a condo in Miami in 2005.
That was the narrative that came out after the housing bubble, all these greedy, short-sighted people.
But there’s a really interesting data.
If you look at the percentage of Florida homes whose previous owner held the property for less than six months, people who were just literally flipping houses like they would a stock, it exploded during the housing bubble in the mid-2000s.
The marginal buyer in 2005 did not care about long-term price to income ratios like a finance geek would.
It’s easier to rationalize overpaying for a house if you’re going to flip it in the next month.
That’s why a lot of these decisions that in hindsight look so crazy, they actually made a lot of sense to the people at the time doing it, even when those decisions didn’t turn out great for them.
So again, you don’t have to think that any of those decisions were right.
And you definitely don’t have to consider them smart, because most of them were not.
But they probably made more sense to the person who made them at the time, based off of their reasoning.
And sometimes it’s reasoning that you might actually empathize with if you could have heard that narrative that was in their heads.
So people are very often wrong, but very few, very seldom, are they crazy.
Two things to keep in mind once you come to terms with that.
Number one is be careful taking cues from other people when you have no idea what they’re thinking.
Many finance and investment decisions are rooted in watching what other people do, and either copying them or betting against them.
But when you don’t know why someone behaves like they do, you don’t know how long they’ll continue acting that way, or what will make them change their mind, or whether they’ll ever learn their lesson.
Bubbles, financial bubbles, claim victims when short-term momentum entices traders with ever shortening time horizons, who then inadvertently influence the behavior of long-term investors.
Number two, and the most important.
Nobody is crazy, including you.
But everyone justifies actions based off of poor reasoning, including you.
At me.
Nobody makes a financial decision on a spreadsheet.
We’re very seldom do they do that.
We make financial decisions at the dinner table, or in a company meeting, where your personal history and your own unique view of the world, your ego, your pride, marketing, incentives are all scramble together into reasoning that can look crazy to others.
But it weaves together a narrative that works for you.
I do this, you do this.
Look, the fun part of behavioral finance is learning about how flawed other people can be.
The hard part is trying to figure out how flawed you are, and what stories make sense to you, but would seem crazy to others.
That’s it for this episode.
By the way, if you’re looking for another podcast to listen to, check out The Run Downed by my friends at public.com.
That’s a financial news podcast that you can listen to in just five minutes.
Short and sweet, just like my own podcast.
In The Run Down, you’ll learn about the stocks that are making the biggest moves this week.
You get caught up on what happened in the global economy, and figure out what’s happening in the wild, all of those volatile world of crypto.
Maybe you’ll even learn why your co-workers crypto advice is probably terrible, and you shouldn’t listen to it.
Each episode of The Run Downed is just five minutes, and you’ll walk away in the loop of understanding everything that’s happening in the finance and economic world.
Check it out.
Hope you enjoy it.
And thanks again for listening.
We’ll see you next time.