The $ 1 Lottery Ticket.
An interesting example! I am not sure if this relates to the discussion on the topic but at least this one can be calculated. A poor man can afford to lose 1 Dollar and win the jackpot, or something in between. He has a definite chance of winning: A greedy rich guy might want to buy all the tickets in the lottery. In the end he is certain to lose money-No chance of winning anything(Certain Negative Payout).
So, this lottery game is simply a matter of mathematics, but in practice it is not a rational affair. Many people buy 10 or 20 tickets in order to win more but they do not realise that the payout relative to the cost is diminishing as the number of tickets they buy is rising. It would be interesting to calculate if there is an optimum number of tickets in a lottery game.
I think if you analyse this rigorously it will be shown that the best financial option is to buy 1 ticket instead of 20(unless there is indeed an optimum). However emotionally people are driven to think that more tickets is better. What is happening is this: The willingness to loose more money(buying more tickets) is tempered at some point by the effects of the potential loss(cant afford to buy more tickets). Misunderstanding how the chances are related to the number of tickets plays a much lesser role here.
So, I remain with my way of thinking about investing: The combination of odds and payout will determine what the best financial option is(reaping high profits in the long term). On top of this, an individual's interpretation of what is more important for him will always enter into the choice as to what he prefers, and can afford to lose.
What is interesting in this is that for each case one must use the optimum strategy that is defined by his objectives. A general formula for this is not possible, in my opinion.
Conrad
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