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April 13, 2007

Comments

This is silly.

You jest, but somewhere, someone is reading this blog post and putting your ideas into action ...

Surely one could easily replicate this "lottery" by buying path-dependent options with low exercise probability on the financial markets. People are not doing this, so this service must be less appealing than it intuitively seems.

zzz, I think you underestimate how people perceive gambles. Investing in financial markets isn't perceived as a bet, since we like to believe that if you only knew enough, you could make the right choices (whether you actually can or not is another matter). With lotteries and other forms of gambling, it doesn't matter how much you know, you can't anticipate the outcome any better than if you had no additional information. That, I think, is part of why gambling is much more popular than investment: even the least skilled person has the same chance of winning as the most.

Bravo!

Gordon, I recommend the Satiricon of Petronius for some fantastic confirmation of your model of gambling applied to life success in general.
It's fairly difficult for Americans, raised on meritocracy, and perhaps before than on the assumption of wise and just gods, to relate to the strong desire, expressed by many characters, for an unjust and capricious world. I suppose that if people imagine "lucky", "blessed", or "well fated" to be personal traits they can then easily believe that they are above average on those traits. The last, in particular, is not easily disconfirmed.

Surely one could easily replicate this "lottery" by buying path-dependent options with low exercise probability on the financial markets. People are not doing this, so this service must be less appealing than it intuitively seems.

I wonder what the odds actually are on "striking it rich" in a short period of time by treating financial markets as a gambling game. Is it better or worse than, say, the roulette wheel in a casino? If you bet $30,000 on a single number in a roulette wheel, you have a one in 38 chance of getting a 35x payout of $1,050,000. Can the financial markets give you a better than 1 in 38 chance of turning $30,000 into over $1,000,000 within a year before you lose your initial stake?

Can the financial markets give you a better than 1 in 38 chance of turning $30,000 into over $1,000,000 within a year before you lose your initial stake?

If you assume that option prices are well-calibrated, you could just buy $30,000 of any kind of option that would pay off $1,050,000 if it ended up in-the-money. Not sure that's a fair assumption though.

Eliezer, did you mean to evoke stock markets with "You could feed it to a display on people's cellphones"?


Surely financial markets are well-calibrated for events that happen once a month. Then an option that such an event will happen tomorrow is should be about right.
Some claim that there is systematic bias in options against rare events, that on a long shot you do better than even.

Eliezer, did you mean to evoke stock markets with "You could feed it to a display on people's cellphones"?

Perhaps so, but stock market investors are not trying to "strike it rich" for a single dollar, or even to earn a 3500% return. They have a large stake in the game, and their greatest worry is that a market crash may wipe out their investment.

This idea is intriguing, but I don't know if it would be as popular as the other lottery. It can be hard to maintain excitement about something for a long period of time (with the regular lotto you can recharge between when you find out you've lost and when you buy your next ticket). You also couldn't gather around the T.V with your family/friends and their tickets, because you'd have to spend an undefined amount of time waiting.

Some economist once stated something like, the stock market is like a casino with odds against the "house". It means the expected gain is not zero, but positive.

If the market grows at g, with a little financial engineering, it should be possible to create a portfolio with expected gain somewhere between zero and g, with a very very long tail, i.e., a non-zero chance of huge payoffs.

Such a lottery can be had.
If there is an epsilon chance that a given lottery ticket is a winner,
there is also an epsilon prime chance that a winning ticket will be lost and that you will find it, for zero dollars expenditure on your part.
Thus, there is an epsilon multiplied by epsilon prime chance that you will be a lottery winner without actually buying into the lottery.
If you get your hopes up for this scenario, are you a free-loader?

_Gi: you have described exactly my lottery strategy, as well as that of Patti Smith:

Every night before I go to sleep
I find a ticket, win a lottery
Scoop them pearls up from the sea
Cash them in and buy you all the things you need...

Or we could just start a lottery where:
a) You deposit money into a bank account
b) You let it gather interest for 90 days.
c) Use the interest to pay for handling fees
d) Distribute 100% of the money back to the people who deposited it.

That is the service the public thinks we're selling: a uniform income distribution generator thingy.

It exists in the UK, it's called "Premium Bonds"...

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