Does the Lotto make people blind and stupid?

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Re: Does the Lotto make people blind and stupid?

Postby Yakk » Wed Feb 23, 2011 12:17 am UTC

Almost everyone?

1% above inflation interest and/or long-term return. (going much above this is gambling)

10% of an average US citizen's GDP share saved per year, or ~5000$.

30 year saving period.

At the end, you have (in k$), 5*1.01^30 + 5*1.01^29 + .. + 5 = (1.01^0 - 1.01^31)/(1-1.01) =~ 169 thousand dollars.

Now lets suppose you gambled and went for a 2.5% over inflation return. 214 thousand dollars.

How about a ridiculously insane investment plan, and 4% over inflation return? 275 thousand dollars.

Lets invest 40% of the US average citizens GDP per capita! 1.1 million dollars. Finally, a chunk of actual wealth.

So, getting 4% over-inflation returns (which is crazy good returns on the long run, which 30 years is starting to approximate -- note, backward-facing 30 year returns are easy to cherry pick), saving 40% of the average US citizens GDP per capita (or 20,000$), after 30 years you'll have saved up a million bucks. (Note: you can get 4% over-inflation returns, but if you expect that there is a reliable investment strategy that gets 4% over-inflation returns for the next 30 years that anyone could find and buy and next to nobody who tried to do this would be wrong, you are being deluded. Now someone will be right on the subject in the next 30 years, and will manage returns well above this...)

Yes, the math is easy to run. No, not "almost everyone" *can* accumulate real wealth over their lifetime. Unless you mean "can" in the same sense as "almost everyone can be a lottery winner". Or by real wealth you mean less than a million dollars?
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Re: Does the Lotto make people blind and stupid?

Postby Vaniver » Wed Feb 23, 2011 4:24 am UTC

Yakk wrote:Yes, the math is easy to run. No, not "almost everyone" *can* accumulate real wealth over their lifetime. Unless you mean "can" in the same sense as "almost everyone can be a lottery winner". Or by real wealth you mean less than a million dollars?
Assuming 4% returns, continuous constant contributions, and continuous compounding, you need ln(2)/.04=17.3 years to have passive income equal to what you've been saving. The general formula seems to be ln(n+1)/r, where n is the multiple of your savings and r is the interest rate- so if you save a third of your income, meaning you need double what you save to maintain the same lifestyle, that's 27.5 years. Lower interest rates make things take significantly longer- 2% returns instead of 4% returns doubles the necessary accumulation time- but I'm presuming you plan to live forever / want to bequeath a significant estate, and relaxing that makes things easier.

Real wealth is measured in human happiness, not dollars. There's nothing magic about $1e6.
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Re: Does the Lotto make people blind and stupid?

Postby morriswalters » Wed Feb 23, 2011 2:49 pm UTC

Try doing that on the median income. And at the same time raise two kids, buy a house, pay taxes, and keep a car.

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Re: Does the Lotto make people blind and stupid?

Postby Dark567 » Wed Feb 23, 2011 4:32 pm UTC

Vaniver wrote:Assuming 4% returns, continuous constant contributions, and continuous compounding, you need ln(2)/.04=17.3 years to have passive income equal to what you've been saving. The general formula seems to be ln(n+1)/r, where n is the multiple of your savings and r is the interest rate- so if you save a third of your income, meaning you need double what you save to maintain the same lifestyle, that's 27.5 years. Lower interest rates make things take significantly longer- 2% returns instead of 4% returns doubles the necessary accumulation time- but I'm presuming you plan to live forever / want to bequeath a significant estate, and relaxing that makes things easier.
Hell, 4% is probably a pretty conservative estimate. The average S&P return a year is 11%, and if you had 40/60 bond/equity ratio, you would still probably get 5-7%. The problem of course is that the variance from year to year is very high.... some decades return 300% and some return 0%. If you hit a couple of the former you can build up wealth in 15-20 years, if you hit the later, well, it will take you 30-50 years to build that type of wealth.
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Re: Does the Lotto make people blind and stupid?

Postby Zamfir » Wed Feb 23, 2011 5:08 pm UTC

Dark567 wrote:The average S&P return a year is 11%.

Are you sure that's a reliable figure? Stock indices have the nasty effect that badly performing firms drop out, and succesful firms enter the index. So the index performs in the long run better than an investor would.

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Re: Does the Lotto make people blind and stupid?

Postby Yakk » Wed Feb 23, 2011 5:12 pm UTC

Vaniver wrote:
Yakk wrote:Yes, the math is easy to run. No, not "almost everyone" *can* accumulate real wealth over their lifetime. Unless you mean "can" in the same sense as "almost everyone can be a lottery winner". Or by real wealth you mean less than a million dollars?
Assuming 4% returns,

4% returns are crazy ass high in any kind of non-backwards looking situation. Assuming you are talking about real-dollar returns.
continuous constant contributions, and continuous compounding, you need ln(2)/.04=17.3 years to have passive income equal to what you've been saving.

So after 17.3 years, you have earned enough to make yourself no worse off than had you not saved at all.
so if you save a third of your income, meaning you need double what you save to maintain the same lifestyle, that's 27.5 years. Lower interest rates make things take significantly longer- 2% returns instead of 4% returns doubles the necessary accumulation time- but I'm presuming you plan to live forever / want to bequeath a significant estate, and relaxing that makes things easier.

And you should be expecting a 1% return on investment. 4% ROI is only reasonable if you identify economic situations similar to an industrial revolution and manage to put your money into it reliably and get it out before things go pear-shaped. (4% ROI means a 50 fold increase in wealth over a century -- industrial revolutions that shake the foundations of the world pull off 2% per capita increase in real GDP! To hit 4% annual ROI, you need to both harness something of that scale, and manage to transfer huge shares of the nations wealth from producers to owners, or from the masses to the owners while increasing the population by a similar 2% annually).

So if you invest 1/3 of your pre-tax income for 70 years, you end up with an investment that can keep up with inflation and generate 1/3 of your income as an income stream in perpetuity.
Real wealth is measured in human happiness, not dollars. There's nothing magic about $1e6.

...

No, there is nothing magic about 1e6. I picked it as a number that is at the low end of "real wealth" -- at the point where you have 1 million dollars in (real dollar) assets, you are wealthy enough to live in a typical US middle class (not upper middle class, just middle class) lifestyle for almost a lifetime before you go broke, with your investment being are mostly shielded from the chaos of the markets. (or you could pass that on to your children) It is also close to the point where you could spend full time ekeing out a 1% increase in ROI by closely managing your investments and be paid ~5$ per hour for your troubles.

On top of that, the strategies describe get worse if more people engage in them. If most people invested 1/3 of their income in saving up in order to do something similar to an "early retirement" where they can live passively off their income, you'd need a hyper-industrial revolution in productivity in order for the nations living standards not to fall with the reduction in people producing things. I guess it could transfer wealth from the existing ownership class to the newly "early retired" class, but the existing ownership class (economic class, not social) mainly uses their wealth for political / economic game-type power rather than direct consumption -- there isn't all that much consumption to move over to the new early-retiree class.

That is why "almost everyone" cannot do such an action -- the magic of finance moving money around doesn't produce anything except power differences unless it involves people making smarter decisions about where to move resources to produce things more efficiently. (it does generate incentives to move the economy away from producing goods now, and towards producing goods in the future -- but this is limited by current technology and decreasing marginal returns on investing in technological growth (including the difficulty of capturing profits from said investments).)
Dark567 wrote:Hell, 4% is probably a pretty conservative estimate. The average S&P return a year is 11%, and if you had 40/60 bond/equity ratio, you would still probably get 5-7%. The problem of course is that the variance from year to year is very high.... some decades return 300% and some return 0%. If you hit a couple of the former you can build up wealth in 15-20 years, if you hit the later, well, it will take you 30-50 years to build that type of wealth.
S&P returns are historical anomalies and non-sustainable, much as early 2000s real estate returns are anomalous. They are not a "new paradigm" for the same reason why you cannot pay someone a penny on day one, and double the amount you pay them, for two months. (Note that this doesn't imply a bubble, but rather the impossibility for 7% over inflation returns on investment to continue indefinitely.)

The fact that backwards-facing investments existed that generated a particular level of return is something I acknowledged.

For a non-bubble-valued investment to manage X% return, it has to be able to restructure to return X% dividends.

Currently the S&P represents ~12e12 dollars. Suppose a 7% over-inflation return -- or 840 billion dollars per year.

Assume a US GDP growth of 3% over the next 50 years. Current US GDP is about 13 trillion (from memory).

In 50 years, US real GDP ends up at 57 trillion. S&P market cap ends up at 353 trillion. 7% of that is 25 trillion, or 43% of US GDP. Ie -- 43% of the US economic output has to be profit for companies listed on the S&P 500. None of that is salary, costs, or anything else but profit. In comparison, the number today is 6.5%.

50 more years -- US real GDP is at 250 trillion, S&P 500 market cap totals 10400 trillion, S&P 500 profits are on the order of 730 trillion, or 2.9 times the GDP of the USA.

Note that I'm doing a 3% GDP growth rate -- this assumes that the next century the US has a growth rate similar to world-shaking industrial revolutions. And despite that, the S&P 500 is not in any shape or form going to be able to grow at 7% per year.

Past performance is not a predictor of future returns.
One of the painful things about our time is that those who feel certainty are stupid, and those with any imagination and understanding are filled with doubt and indecision - BR

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Re: Does the Lotto make people blind and stupid?

Postby Vaniver » Wed Feb 23, 2011 9:25 pm UTC

morriswalters wrote:Try doing that on the median income. And at the same time raise two kids, buy a house, pay taxes, and keep a car.
My current income is about half the median income, and I am saving. I don't have kids and am not invested in real estate (which I expect is a poor investment for most people), but I do pay what taxes I owe and keep a car.

Zamfir wrote:Are you sure that's a reliable figure? Stock indices have the nasty effect that badly performing firms drop out, and succesful firms enter the index. So the index performs in the long run better than an investor would.
If your index is broad enough, that effect is barely noticeable. The real benefits from investing in an index come from not paying fees, negative correlation of individual stock returns, and dividends, not selection effects like that.

Yakk wrote:So after 17.3 years, you have earned enough to make yourself no worse off than had you not saved at all.
No worse off? The income is passive. That's retiring at 35.

Yakk wrote:typical US middle class
There is a tradeoff between saving and consumption. In order to support a middle class lifestyle passively, you need to be able to produce a significant amount of value beforehand. If you don't have those skills, you have the choice of actively supporting a middle class lifestyle or passively supporting a lower class lifestyle. I think many people don't think about that choice clearly enough, and so make the wrong one.

Yakk wrote:On top of that, the strategies describe get worse if more people engage in them. If most people invested 1/3 of their income in saving up in order to do something similar to an "early retirement" where they can live passively off their income, you'd need a hyper-industrial revolution in productivity in order for the nations living standards not to fall with the reduction in people producing things.
So, you're saying it has the same failure modes as welfare and social security?

I agree that there's a limit to how large the leisure class can be (though that limit increases with technological development). I don't think that's a relevant criterion as to whether or not you personally should follow this strategy. As things stand now, this strategy works and is proven.
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Re: Does the Lotto make people blind and stupid?

Postby Yakk » Thu Feb 24, 2011 2:42 pm UTC

Vaniver wrote:
Yakk wrote:So after 17.3 years, you have earned enough to make yourself no worse off than had you not saved at all.
No worse off? The income is passive. That's retiring at 35.

The income equals what you saved. So if you where saving 5000$ a year, after 17.3 years at amazingly high return (ie, you gambled and won), your income from investments is enough to replace your 5000$ in savings.
Yakk wrote:typical US middle class
There is a tradeoff between saving and consumption. In order to support a middle class lifestyle passively, you need to be able to produce a significant amount of value beforehand. If you don't have those skills, you have the choice of actively supporting a middle class lifestyle or passively supporting a lower class lifestyle. I think many people don't think about that choice clearly enough, and so make the wrong one.

So you define "real wealth" to be having enough food to eat, a roof over your head, and the ability to communicate, passively?
Yakk wrote:On top of that, the strategies describe get worse if more people engage in them. If most people invested 1/3 of their income in saving up in order to do something similar to an "early retirement" where they can live passively off their income, you'd need a hyper-industrial revolution in productivity in order for the nations living standards not to fall with the reduction in people producing things.
So, you're saying it has the same failure modes as welfare and social security?
I didn't state that "most people could go on welfare". I didn't say that "most people" can be on social security (at a given time).

Welfare systems can work if there is sufficient incentive to not stay on welfare (under the US system, strict means testing means that the poor have lower marginal returns on increased income than any other class -- their "effective marginal tax rate" is ridiculous, because actually earning money is used as a proxy for "you don't deserve help".)

Old age security systems work if the percent of the population that is being supported is kept low.

Socialized medicine works if the amount of money it spends on keeping people alive is bounded by sufficiently something other than the whim of the patent, family and doctor.
I agree that there's a limit to how large the leisure class can be (though that limit increases with technological development). I don't think that's a relevant criterion as to whether or not you personally should follow this strategy. As things stand now, this strategy works and is proven.
I'm objecting to the language that implies that a majority of people can do this. This is only true for values of "can" that include "in a 16 person tournament, the majority of people can come in first" is true.

On top of all of that, none of this works without gambling. A current decent proxy for what a "safe" long-term investment looks like is a long-term US treasury bond, which is not returning anywhere near 4% over inflation. The investment industry tells you you can earn 7% or 4% or whatever over inflation, citing past performance, then it tells you that past performance is not a predictor of future returns in the small print, and you don't believe the small print because the large print tells a much more seductive story.
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Re: Does the Lotto make people blind and stupid?

Postby MatteoTom » Sat Feb 26, 2011 9:53 am UTC

Ok I'll admit that I have not read this whole thread (I just started like 30 min ago), but I do want to have a bit of input (aka this may have already been said).

In math class one day the lotto came up, and I offered my opinion that the lotto is just "a tax on people that can't do math." My math teacher then said that it's not always about the money, but the daydreaming you get to do the next few days about what you would do if you won. I accept his idea (even though I don't need to buy a lotto ticket to daydream), and agree as long as it is not an insanely expensive ($10*) ticket and it is not a habit.


*I consider anything more than what I would spend on a coffee at Starbucks expensive ($5ish)

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Re: Does the Lotto make people blind and stupid?

Postby Plasma Mongoose » Fri Mar 04, 2011 6:41 am UTC

I remember recently waiting in line at the chemist where this lady in front of me was shelling out over $150 on various lottos (apparently she does this every week for more than 10 years!) and I thought to myself, "Lady if you stopped wasting so much money on these useless things, you could have saved enough for a world trip or even a house by now...

I know statistically more likely to win the BIG ONE than I am, but the simple fact is that unless she is really lucky, all she is doing is blowing several thousand a year on a pipedream.
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Re: Does the Lotto make people blind and stupid?

Postby folkhero » Fri Mar 04, 2011 5:36 pm UTC

distractedSofty wrote:So the question is: someone offers you a deal; For $25000 of your hard to get at assets, I will give you a ticket in a raffle for which there are 250 tickets, and the prize is at least $600k, and we'll toss a coin for an extra $1m, in cash that is free and clear for you to spend (remembering that Australia doesn't tax prizes); would you take it?

I sure as hell wouldn't. Any casino in the world with a high stakes craps table could give me a better than 1/70 chance of turning that $25000 into $1.6 million*. The no taxes is nice, I guess, for the Australians, but if we assume 50% tax, then the odds would be just over 1/141. This is still quite a bit better than the 1/250 chance of getting either $.6 million or $1.6 million.


*This is based on the "don't pass" bet which pays 1 to 1 and has a .493 chance of winning each resolved bet. Six consecutive wins with an initial bet of 25000 and betting all you winnings every time, would give you 1.6 million. .493^6 = 1/69.65. The fact that 1.6 million is exactly 64 times 25000 makes the betting strategy quite simple.

**You can get a lower house edge by taking the odds, but those make calculations rather more difficult. I believe you can also get a slightly lower house edge playing baccarat. You might want to look into these options if you really did want to throw this much money around at a casino at one time.
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Re: Does the Lotto make people blind and stupid?

Postby Vaniver » Sat Mar 05, 2011 2:56 am UTC

folkhero wrote:You can get a lower house edge by taking the odds, but those make calculations rather more difficult. I believe you can also get a slightly lower house edge playing baccarat. You might want to look into these options if you really did want to throw this much money around at a casino at one time.
Well, if you learn to count you could get an edge in your favor, but I don't think any casinos use decks vulnerable to counting these days.
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Re: Does the Lotto make people blind and stupid?

Postby folkhero » Sat Mar 05, 2011 7:02 am UTC

http://wizardofodds.com/baccarat/baccaratapx2.html
Baccarat is, for all practical purposes, not countable. I guess one could lower the house edge ever so slightly by counting, but it certainly wouldn't be worth the time an effort to learn and try to implement.
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Re: Does the Lotto make people blind and stupid?

Postby Thirty-one » Fri Mar 11, 2011 11:49 pm UTC

Just to make a gap in actual discussion, I'll just add a useless anecdote.

This summer, for whatever reason (I usually don't) I was watching TV, when the lottery came on. I was only half paying attention, but then I noticed that the name being read out
was that of an old neighbour of mine, so obviously I started to follow more closely. Turned out she won a million and a bit of our strange currency, so about a fifth of a million dollars.
I was very pleased, as she seemed like an alright lady. Doubly pleased though as her husband, a nice guy too, used to be my maths teacher and like all my maths teachers had had
at least one mini-rant about how the lottery is a tax on stupid people.

Obviously not saying her winning disproves that, but it still gave me a chuckle.
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Re: Does the Lotto make people blind and stupid?

Postby Yakk » Sat Mar 12, 2011 2:48 am UTC

The stupid people thing shouldn't be used.

"People prone to addiction" might be better.
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Re: Does the Lotto make people blind and stupid?

Postby Dark567 » Fri Mar 25, 2011 4:42 pm UTC

So I noticed recently that the Powerball jackpot was high enough that the expected return on it was positive($1.65 on $1 ticket). Being a non-gambler because I don't particularly like negative return games, should I have been buying lottery tickets? It seems as if due to the structure of the jackpots(when nobody wins, they add more too it) that by only buying tickets when the Expected return is positive(a rarity) its actually a winning game. Huh.
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Yakk wrote:The question the thought experiment I posted is aimed at answering: When falling in a black hole, do you see the entire universe's future history train-car into your ass, or not?

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Re: Does the Lotto make people blind and stupid?

Postby Yakk » Fri Mar 25, 2011 7:20 pm UTC

Dark567 wrote:So I noticed recently that the Powerball jackpot was high enough that the expected return on it was positive($1.65 on $1 ticket). Being a non-gambler because I don't particularly like negative return games, should I have been buying lottery tickets? It seems as if due to the structure of the jackpots(when nobody wins, they add more too it) that by only buying tickets when the Expected return is positive(a rarity) its actually a winning game. Huh.

That assumes you are a lone winner.

When the naive expected return passes unity, look in the past -- what happened to the number of tickets sold? Because expected return is lower as number of tickets grows.

The approximation of 1/# of possible combinations is good for low ticket sales -- as ticket sales grow, the chance of a split-jackpot also grows, dropping expected returns below that level. An easy argument can be made from symmetry -- work out the expected ROI if you bought every ticket, then divide by the number of tickets sold for the ROI per player.

Players basically buy random tickets. So with a 1/n chance of each ticket winning, m tickets purchased randomly have about a (1-1/n)^m chance of winning. If you bought every ticket purchased, you'd win the entire jackpot, so the return on win is simple. We then divide by the number of tickets purchased, for:
((1-1/n)^m)/m
as our expected return from buying a ticket where each ticket has a 1/n chance of winning and there are m tickets purchased.

To make this easier, we'll take the ln:
ln((1-1/n)^m)/m
= m ln(1-1/n) - ln(m)
Now, d/dx ln(x) @ 1 = 1, so for large n, ln(1-1/n) =~ -1/n. This gives us:
=~ -m/n - ln(m)
as the expected "ln win share" we get. Raise this to the power e:
e^(-m/n - ln(m))
= 1/ e^(m/n) * 1 / m
Now, suppose naive the payoff ratio is p -- with a 1/n chance of winning, you win n*p ticket purchase price. Then the ROI on buying a ticket is:
= np / e^(m/n) / m
Lets define the "participation ratio" r to be m/n -- the naive percentage of tickets sold. Then:
= p / e^r / r
is your expected payoff.

Imagine a game with a 1 in 10,000,000 chance of winning with 10,000,000 tickets sold. It has a payoff of 1.65 and a participation ratio of 1.0.

Payoff is = 1.65 / e^1 / 1 = 0.60700107793287983063261422076641
well below unity.

Lets solve for the break-even point. r * e^r = 1.65
r =~ 0.765

So if the participation ratio breaks 3/4 historically (ticket sales break 3/4 of the inverse of the odds of winning), a 1.65 payoff isn't sufficient to break even.

Second, pay attention to taxes.
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Re: Does the Lotto make people blind and stupid?

Postby KingofMadCows » Fri Mar 25, 2011 9:06 pm UTC

Gambling in general is effective because variable ratio reinforcement is more effective than fixed ratio reinforcement. Skinner did experiments with pigeons where he gave the pigeon a choice between a fixed ratio schedule where it would get food for every X number of times it pecked a disk and a variable ratio schedule where it got food for a random number of pecks. The pigeons would always pick the variable ratio reinforcement even when on average it paid off far less than the fixed ratio reinforcement.

Later research found that near hits can also reinforce behavior in humans. They did an experiment where they had one group play a regular slot machine and they had another group play a rigged machine that gets a lot of near hits so for example, the slot machine would always get something like 7-7-7-6 or 2-3-2-2 or 3-3-4-3 where it's just one number away from winning. The group that played the rigged slot machine played spent much more money and played much longer than the group that played the regular slot.

Playing the lottery has a similar effect. For example, if the winning numbers are 3-10-22-29-36 and you got 4-10-23-27-34 where the numbers are close to the winning number then you'll be more likely to play again. We just don't have a very good intuitive understanding of randomness. We don't really understand that it doesn't matter if you're off by 1 or by 100 so we tend to carry over other ways of thinking when we play games of chance. We tend to think of it as a skill rather than chance. We think that because when we play basketball, almost getting the ball in the basket is much better than throwing the ball into the crowd then getting a number close to the winning number must be better than getting a number that's really far from the winning number.

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Re: Does the Lotto make people blind and stupid?

Postby mmmcannibalism » Fri Mar 25, 2011 11:18 pm UTC

KingofMadCows wrote:Gambling in general is effective because variable ratio reinforcement is more effective than fixed ratio reinforcement. Skinner did experiments with pigeons where he gave the pigeon a choice between a fixed ratio schedule where it would get food for every X number of times it pecked a disk and a variable ratio schedule where it got food for a random number of pecks. The pigeons would always pick the variable ratio reinforcement even when on average it paid off far less than the fixed ratio reinforcement.

Later research found that near hits can also reinforce behavior in humans. They did an experiment where they had one group play a regular slot machine and they had another group play a rigged machine that gets a lot of near hits so for example, the slot machine would always get something like 7-7-7-6 or 2-3-2-2 or 3-3-4-3 where it's just one number away from winning. The group that played the rigged slot machine played spent much more money and played much longer than the group that played the regular slot.

Playing the lottery has a similar effect. For example, if the winning numbers are 3-10-22-29-36 and you got 4-10-23-27-34 where the numbers are close to the winning number then you'll be more likely to play again. We just don't have a very good intuitive understanding of randomness. We don't really understand that it doesn't matter if you're off by 1 or by 100 so we tend to carry over other ways of thinking when we play games of chance. We tend to think of it as a skill rather than chance. We think that because when we play basketball, almost getting the ball in the basket is much better than throwing the ball into the crowd then getting a number close to the winning number must be better than getting a number that's really far from the winning number.


Just for the second part, I think that may actually be an example of a rational process working at some level. If I see that I have almost hit the jackpot 5 instead of 3 times in an hour; its going to look like that machine has a better long term payoff.
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Re: Does the Lotto make people blind and stupid?

Postby KingofMadCows » Sat Mar 26, 2011 1:28 am UTC

mmmcannibalism wrote:
KingofMadCows wrote:Gambling in general is effective because variable ratio reinforcement is more effective than fixed ratio reinforcement. Skinner did experiments with pigeons where he gave the pigeon a choice between a fixed ratio schedule where it would get food for every X number of times it pecked a disk and a variable ratio schedule where it got food for a random number of pecks. The pigeons would always pick the variable ratio reinforcement even when on average it paid off far less than the fixed ratio reinforcement.

Later research found that near hits can also reinforce behavior in humans. They did an experiment where they had one group play a regular slot machine and they had another group play a rigged machine that gets a lot of near hits so for example, the slot machine would always get something like 7-7-7-6 or 2-3-2-2 or 3-3-4-3 where it's just one number away from winning. The group that played the rigged slot machine played spent much more money and played much longer than the group that played the regular slot.

Playing the lottery has a similar effect. For example, if the winning numbers are 3-10-22-29-36 and you got 4-10-23-27-34 where the numbers are close to the winning number then you'll be more likely to play again. We just don't have a very good intuitive understanding of randomness. We don't really understand that it doesn't matter if you're off by 1 or by 100 so we tend to carry over other ways of thinking when we play games of chance. We tend to think of it as a skill rather than chance. We think that because when we play basketball, almost getting the ball in the basket is much better than throwing the ball into the crowd then getting a number close to the winning number must be better than getting a number that's really far from the winning number.


Just for the second part, I think that may actually be an example of a rational process working at some level. If I see that I have almost hit the jackpot 5 instead of 3 times in an hour; its going to look like that machine has a better long term payoff.


It's an overextension of a rational process. People often treat gambling like a skill rather than as just dumb luck. When learning skills, getting near hits mean you're improving. For example, if you're learning archery, you're going to completely miss the target at the beginning but as you practice more, you'll be able to shoot the arrow closer and closer to the target. You practice some more and you'll hit the target. In that case, getting near hits is an indication of improved skill and the fact that it reinforces the behavior is a good thing since it'll get you to practice more, leading to further improvement of the skill, until eventually, you'll be able to hit the bullseye. That's the kind of mentality gamblers often have. When they get near hits, they think their gambling skill is improving and that if they practice more then they'll eventually hit the jackpot. The fact that it's all just random doesn't matter since this is not really conscious process. When you learn a skill, you don't assess your own improvements. You need an external agent to assess your progress. Gamblers don't assess the situation either and unfortunately, there's rarely an external agent that assesses their progress.

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Re: Does the Lotto make people blind and stupid?

Postby omgryebread » Sat Mar 26, 2011 2:06 am UTC

KingofMadCows wrote:It's an overextension of a rational process. People often treat gambling like a skill rather than as just dumb luck. When learning skills, getting near hits mean you're improving. For example, if you're learning archery, you're going to completely miss the target at the beginning but as you practice more, you'll be able to shoot the arrow closer and closer to the target. You practice some more and you'll hit the target. In that case, getting near hits is an indication of improved skill and the fact that it reinforces the behavior is a good thing since it'll get you to practice more, leading to further improvement of the skill, until eventually, you'll be able to hit the bullseye. That's the kind of mentality gamblers often have. When they get near hits, they think their gambling skill is improving and that if they practice more then they'll eventually hit the jackpot. The fact that it's all just random doesn't matter since this is not really conscious process. When you learn a skill, you don't assess your own improvements. You need an external agent to assess your progress. Gamblers don't assess the situation either and unfortunately, there's rarely an external agent that assesses their progress.
I don't think it's related to the thought of skill in pure random chance gambling. It seems to be more of the gambler's fallacy that they are "due" a win. Partly because of bad math. Playing Ragnarok Online, you have a 1 in 10,000 chance of getting a card from a monster. Tons of people kill 9000 and complain about how unlucky they are, because in their mind, it's a 90% chance or something to get a card.

Skill, or perception of it, anyway, probably does play a part in a lot of gambling though. People overestimate their skill at poker, and plenty of people assume that good blackjack players can win. (Without counting cards, it's impossible to get better than even odds in a casino on blackjack.) I've heard my family talk about strategies for choosing lotto numbers, even.
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Re: Does the Lotto make people blind and stupid?

Postby KingofMadCows » Sat Mar 26, 2011 2:21 am UTC

omgryebread wrote:
KingofMadCows wrote:It's an overextension of a rational process. People often treat gambling like a skill rather than as just dumb luck. When learning skills, getting near hits mean you're improving. For example, if you're learning archery, you're going to completely miss the target at the beginning but as you practice more, you'll be able to shoot the arrow closer and closer to the target. You practice some more and you'll hit the target. In that case, getting near hits is an indication of improved skill and the fact that it reinforces the behavior is a good thing since it'll get you to practice more, leading to further improvement of the skill, until eventually, you'll be able to hit the bullseye. That's the kind of mentality gamblers often have. When they get near hits, they think their gambling skill is improving and that if they practice more then they'll eventually hit the jackpot. The fact that it's all just random doesn't matter since this is not really conscious process. When you learn a skill, you don't assess your own improvements. You need an external agent to assess your progress. Gamblers don't assess the situation either and unfortunately, there's rarely an external agent that assesses their progress.
I don't think it's related to the thought of skill in pure random chance gambling. It seems to be more of the gambler's fallacy that they are "due" a win. Partly because of bad math. Playing Ragnarok Online, you have a 1 in 10,000 chance of getting a card from a monster. Tons of people kill 9000 and complain about how unlucky they are, because in their mind, it's a 90% chance or something to get a card.

Skill, or perception of it, anyway, probably does play a part in a lot of gambling though. People overestimate their skill at poker, and plenty of people assume that good blackjack players can win. (Without counting cards, it's impossible to get better than even odds in a casino on blackjack.) I've heard my family talk about strategies for choosing lotto numbers, even.


There's not a lot of thought that goes into it. It's just something that we've been taught to do. That's why these behaviors can be replicated in animals. There have been experiments that showed pigeons were willing to pick the variable ratio reinforcement over the fixed ratio reinforcement even when the variable ratio reinforcement did not provide enough food for them to maintain their normal body weight. They had to stop the experiment to prevent the pigeons from starving themselves to death.

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Re: Does the Lotto make people blind and stupid?

Postby omgryebread » Sat Mar 26, 2011 3:20 am UTC

KingofMadCows wrote:There's not a lot of thought that goes into it. It's just something that we've been taught to do. That's why these behaviors can be replicated in animals. There have been experiments that showed pigeons were willing to pick the variable ratio reinforcement over the fixed ratio reinforcement even when the variable ratio reinforcement did not provide enough food for them to maintain their normal body weight. They had to stop the experiment to prevent the pigeons from starving themselves to death.
That's pretty wild. I wouldn't have expected animals to be that risk-seeking. Humans are probably more risk-seeking than I expect as well.
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Re: Does the Lotto make people blind and stupid?

Postby VMhent » Sun Mar 27, 2011 7:41 am UTC

I think the simple answer is that it's not necessarily stupid in itself, just stupid in sight of competing options. All a lottery ticket really is is a low-yield investment. You could buy a Vanguard Index- especially one of the riskier ones for entertainment's sake- and ultimately come out ahead of a lottery ticket. The above analysis about the comparative value of your average investments and the lotto is good and thought provoking, but ultimately acknowledges that average investments will end up paying higher.


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