0947: “Investing”

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Re: 0947: “Investing”

Postby rhomboidal » Mon Sep 05, 2011 7:49 pm UTC

Yes, compound interest is a great way to make money -- for buying lottery tickets.

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Re: 0947: “Investing”

Postby unus vox » Mon Sep 05, 2011 9:49 pm UTC

lalop wrote:
mania wrote:Now I'm not saying it's at all a wise investment decision, and I'm not recommending people play. But this "state tax on people who are bad at math", oft-repeated, I feel is incorrect. The players may have actually done the maths, worked out the $10 a week they're spending is not hurting them and the dream of one day having a lot of money (along with the very slim chance of it actually happening) is worth it to them.


So people are throwing money away to get an endorphin rush, and the state is cleaning up at the bottom. While, fair enough, what you do with your money is up to you, I would just think there are better ways to invest it. (Even if you invested in an xbox, for instance, you'd at least get the xbox back in return!)


If someone enjoys playing the lottery, it's not exactly money wasted. Just because you don't win doesn't mean it wasn't worth the shot for some people. If you can afford a few bucks a week, it's not exactly throwing away tons of money. To further your Xbox analogy, when you invest in a video game system, you're the only one reaping its rewards. But at least the money from lotteries goes somewhere. Especially in a nation where people are terrified of letting go of their money for the good of the public, and where the phrase "tax increase" is a political death sentence, it's nice to know we can play (yes, play) the lottery for public good. :D

I don't even play the lottery. Personally, I don't find it fun. But I have gone to casinos and done a bit of black jack. For me, that is fun, and I always go in knowing how much I'm willing to lose. In my estimation, money is only wasted if its rewards are (to the person) not worth its cost, and/or is being used in lieu of basic necessities.
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Re: 0947: “Investing”

Postby haso18 » Mon Sep 05, 2011 9:54 pm UTC

(1.02)^10 = 1.21899
Its that simple. 1219 not 1279

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Re: 0947: “Investing”

Postby haso18 » Mon Sep 05, 2011 9:57 pm UTC

I get it. You counted year zero getting 11 years of compound interest on what to the listener sounds like 10 years. Its an 11 year investment.

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Re: 0947: “Investing”

Postby Atticus » Mon Sep 05, 2011 11:32 pm UTC

When you buy an xbox a lot of people reap the rewards. The profit made by the retailer helps pay the salaries of everyone working there, likewise down the chain for the distributors and manufacturers all the way down to oil wells and mines. So you're impacting the lives of a lot of people by buying things.

Compound interest can work wonders, 2% is just too low to be significant. $50K at 8% for 10 years becomes $108K (and $342K in 25 years) so that's something.

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Re: 0947: “Investing”

Postby miraclef » Tue Sep 06, 2011 12:31 am UTC

Maxpm wrote:
miraclef wrote:
Matt228 wrote:I registered just to point out that 1,219 looks a lot like 1,279 when hand written. This is the reason I cross 7s.


There's no excuse not to cross your sevens but look at how he normally writes "1".

I still don't understand how Randall got something wrong kids are taught at age 14...


Handwriting isn't something you can "get wrong." One's handwriting might be messy and ambiguous, sure, but it's not "wrong."


It's obviously not a handwriting issue. Even he wouldn't try to claim that.

He never writes his 1s as anything but a single stroke.

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Re: 0947: “Investing” - $1221.40

Postby Eebster the Great » Tue Sep 06, 2011 1:08 am UTC

rgm wrote:http://www.wolframalpha.com/input/?i=1000+dollars+compounded+continuously+at+2%25+after+10+years&asynchronous=false&equal=Submit

Wolfram Alpha shows me $1221.40. As an aside, their natural language processing is amazing. In order to get $1,279 the interest rate would have to be about 2.4608%.

That is assuming continuous compounding. At annual compounding, it is only $1219, which may be where Randall got his number (the 1 looking similar to a 7).

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Re: 0947: “Investing”

Postby rhhardin » Tue Sep 06, 2011 1:25 am UTC

I suspect it's a woman math is hard joke.

Dilbert long ago had a Dilbert, Wally and a woman, holding Estro magazine, at the lunch table.

Woman: Did you know that men make 25% more than women? It says here that men make $1 for every $.75 women make.

Wally: Actually that's 33% more.

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Re: 0947: “Investing”

Postby buddy431 » Tue Sep 06, 2011 2:44 am UTC

Apeiron wrote:In an economy with fractional reserve lending at interest where private banks can print money at will... savers are losers.

Inflation is around 8%. Don't believe the politician figures, they've been rigging the numbers for a while now to make things seem less bad.

Any investment that pays less than inflation is NOT an investment. It's a safe where your money fizzles away value like an isotope. For it to be an investment, it must BEAT inflation. Savings and checking accounts don't even match inflation. By the way, if your raise this year isn't at least 6% you took a pay cut.

Any investment that beats inflation must entail risk. No one is going to help you beat inflation for free or without risk. This is one of the terrible problems with our monetary policy... it goads people into taking risks with their money.


For the vast majority of people, including myself, "investing" really means "saving". Yes, I "invest" money in the stock market, but what I'm really doing is saving it for when I need it - retirement. Hopefully, the wonders of economic growth means that I have more money than I put in there, but that's not really the point. The point is that I'm making more money than I need to live right now, and at some point in the future, I'll be making less than I need to live. Even if I had no other opportunity to save money in a shoebox under my bed (losing value to inflation), I would still do it, because I know I'll need it later. If "saving is for losers", how do you plan on funding your retirement? I guess you could expect your kids to help you out, but that's becoming less acceptable in the United States.
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Re: 0947: “Investing”

Postby khaighle » Tue Sep 06, 2011 4:49 am UTC

Per Snopes the Einstein comment is apocryphal and dates from the 1980s, when the prime interest rate was north of 12%. At 12% over 10 years $1000 turns into $3105 or so, which is considerably more impressive than $1279. Enjoy borrowing being better than investing while you can, kids.

http://lmgtfy.com/?q=einstein+compound+interest&l=1

Also, with regard to the mother who won't invest in things that can possibly lose money...

A friend of mine who is a CFA once described to me an investment instrument, devised in the depths of the 2007 crash by an insurance firm not to be named, which was essentially this:

"Give us your money (minimum investment US$5,000). At the end of the (5-year) term, we will return your money, GUARANTEED, 100%, you CANNOT POSSIBLY LOSE MONEY, except fees (3%, IE minimum US$150)."

That was it. For those of you paying attention, this amounts to a one-person Ponzi scheme. Leaving your money to rot in your .0000000025% per annum bank account to serve out your minimum deposit and void your banking fees would be approximately infinity times better. Perhaps you should tell your Mom about it.

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Re: 0947: “Investing”

Postby augurey » Tue Sep 06, 2011 5:31 am UTC

Cecil wrote:
augurey wrote:Who considers a savings account investing? At 8% you're at 2,158 after 10 years -- more if you reinvest your dividends.

What are you investing in that grows 8% and also provides a steady dividend?


8% is roughly the rate of return for the DJIA -- if that included reinvesting dividends I don't recall.

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Re: 0947: “Investing”

Postby Pfhorrest » Tue Sep 06, 2011 5:51 am UTC

unus vox wrote:In my estimation, money is only wasted if it [...] is being used in lieu of basic necessities.

Unless you own your own home -- which I don't know the numbers on, but I'm willing to bet most people playing the lottery probably don't -- there is always some basic necessity that you could be better off spending that money on: saving up to get yourself out of serfdom, stop paying someone else's mortgage for them, and putting a down payment on / paying off your own. You are not truly free until you can live without constantly paying someone else for the privilege of using their property. Until playing the lottery gives better odds on achieving that outcome than more traditional investments (including savings accounts and stuffing money under your mattress), there's always something more important you should be doing with it.
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Re: 0947: “Investing”

Postby mania » Tue Sep 06, 2011 8:53 am UTC

Pfhorrest wrote:Until playing the lottery gives better odds on achieving that outcome than more traditional investments (including savings accounts and stuffing money under your mattress), there's always something more important you should be doing with it.


That's fine, provided you apply this logic to all non-essentials.

Which I have to say.. whilst numerically, making some sense, would have to make the payback period the most uninteresting, possibly the worst 15 years of your life. Is that really how you want your youth to early-middle age spent?

(I chose not to say economically, as for that you have to take in other considerations, ie how much value you place on entertainment - movies etc, often going out and having a good time or purchasing a lottery ticket, icecream sundae or takeaway is a perfectly rational thing to do - for your peace of mind.)
Last edited by mania on Tue Sep 06, 2011 9:48 am UTC, edited 1 time in total.

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Re: 0947: “Investing”

Postby Kaijyuu » Tue Sep 06, 2011 9:27 am UTC

I'll just pipe in and say that rich people are rich because they spend their time and money in such a way as to make the most money possible. Buying a lottery ticket is not one of those ways, but then again neither is taking a day off, having a family, spending the weekend playing a good RPG, or anything like that.
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Re: 0947: “Investing”

Postby michelcolman » Tue Sep 06, 2011 10:09 am UTC

ajd wrote:If you compound continuously (which I believe most banks do, you use the formula (principal) * exp(annual rate * number of years), which I calculate coming out to $1,221 for this example...still lower than the comic says.

Banks in Europe (at least in Belgium) only pay interest once a year (although they do take negative interest as soon as they can if you dipped below zero for a day or so)

And if they did pay out interest continuously, I'm sure they would call it 2.02% (which is what this 2% continuous interest would yield after one year) because that would give them an edge in advertising. And I wouldn't even necessarily disagree because In a mathematical sense, I consider it very strange to call this 2%. A mathematical function with a given rate that gives a value different from that rate after one unit of time? Bizarre. Why use (1+rate/n)^(n*years) if you can just use (1+rate)^years? Why would half a year not simply yield the square root of 1.02? But then of course I'm a mathematician and not an economist, there is very little overlap between those two fields, so I'm not surprised that some people are using such a strange definition.

Anyway, I think the most correct value is 1219, which is simply 1.02 ^ 10. And it looks like a copying error was made with a 1 becoming a 7.

I definitely cannot find any way of coming up with 1279, no matter how much you distort the definition of compound interest.

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Re: 0947: “Investing”

Postby michelcolman » Tue Sep 06, 2011 1:10 pm UTC

OK, he fixed it. The comic says "1219" now.

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Re: 0947: “Investing”

Postby ChurchSkiz » Tue Sep 06, 2011 1:29 pm UTC

khaighle wrote:A friend of mine who is a CFA once described to me an investment instrument, devised in the depths of the 2007 crash by an insurance firm not to be named, which was essentially this:

"Give us your money (minimum investment US$5,000). At the end of the (5-year) term, we will return your money, GUARANTEED, 100%, you CANNOT POSSIBLY LOSE MONEY, except fees (3%, IE minimum US$150)."

That was it. For those of you paying attention, this amounts to a one-person Ponzi scheme. Leaving your money to rot in your .0000000025% per annum bank account to serve out your minimum deposit and void your banking fees would be approximately infinity times better. Perhaps you should tell your Mom about it.


Wow...can't believe I didn't think of that. That's a pretty aggressive fee structure though for a fund manager who buys and sells nothing. They should have marketed it as, "We'll even drop the 3% management fee if you call now! That's an additional 3% saved every year!"

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Re: 0947: “Investing”

Postby bluefoxicy » Tue Sep 06, 2011 1:50 pm UTC

SolkaTruesilver wrote:So?

2% is really crappy investment to have. Better invest in government bonds instead.

And it's still 219$ you wouldn't have made if you just kept it under your pillow case. However, it's so crappy rate of return it doesn't beat inflation...


This is pretty much correct.

Long-term investing is the big thing, whereas short-term investments are more gambling. Pull AAPL, Steve Jobs announces stuff, make money, sell... oh, he announced he's retiring, you lost money. No good.

Investment is a retirement thing for me mostly, and an excessive money thing otherwise. When young, invest mostly in high-risk foreign stocks and domestic small caps, and less in large caps and high dividend, low volatility stocks. Aggressive investors are better at this, but also take all their time studying how to invest; for us muggles, paying someone to do it for us is better, hence why you should look into Exchange Traded Funds. In either case, as you get older, you should start moving into more stable investments--even if you're doing stock market stuff yourself, you should diversify into more ETFs and MTFs, bonds, and CDs. Lower return, but more stable: you don't want to retire in a severe economic recession after taking a 50% loss, but you can limp by on a painful 10% drop in your stable investments while you wait for that stuff to recover.

So, in the beginning, you should have stuff that fluctuates wildly. Your small-cap and forex ETFs and stocks will show 25-50% fluctuation. When they're up, you sell and buy into whatever's down. When they drop severely, you buy more. In this way you pump your portfolio via diversification, both through market sectors which fluctuate on different intervals (so you sell what's up and buy what's down, rather than sell-wait-buy) and through varied risk (so some things drop faster than others). You can easily double your money in 7 years, though on high-risk runs with a bigger and more widely diversified portfolio you can do it in 5 or even 4. That's roughly 10% growth per year.

As you go on, you need to change your risk profile so that the money will be there when needed. At 25 you can stand huge gains and losses; at 55, you plan on retiring in like 5 years and you don't want to see a huge market dip in 3 years and then retire at a 30% loss. It's easier to maintain wealth by managing a portfolio with more low risk investments, and when things drop you can pull from the fixed growth stuff like CDs and bonds while letting your more moderate and higher risk investments settle down.

Sure, you can safely stick your money in CDs and make 2%. You can do that in a savings account. You could also try to beat the market ... this will leave you poor, most likely. You really can't quantify "investing" until you know your investment goals, and thus what risks you're willing to take, what time scale you have to take them in, and how you're going to play it out. A retirement fund with aggressive funding is a guaranteed high return because you have like 40+ years to do it across large market fluctuations; you just have to know how to handle it properly and how to bring down your risk near the end. A day trading account, even with "low risk" investments, is someone trying to make money by crafty investing; it's much higher risk. CDs and savings accounts are a different kind of investing, and should be part of a diversified portfolio.

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Re: 0947: “Investing”

Postby bluefoxicy » Tue Sep 06, 2011 1:54 pm UTC

haso18 wrote:(1.02)^10 = 1.21899
Its that simple. 1219 not 1279


But compounded continuously is 1000 * 2.71828183^(0.02 * 10) which is 1,221 ...

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Re: 0947: “Investing”

Postby lolo » Tue Sep 06, 2011 2:00 pm UTC

Okay so while everyone is debating investment policies, let me tell you what this comic is about.

If you search for the quote in question, you'll find that Einstein probably never said that.
At the time the quote appears, early 80s, treasuries were yielding about 15%.
1.15^10 = 4
At those rates the "compounding effect" is pushing 10 years return to some interesting level.

At today's rate of 2%, we have
1.02^10 = 1.2

That is the exponential function can be linearly approximated around 0, and so there's almost no "compounding effect" around low rates.
Last edited by lolo on Tue Sep 06, 2011 3:45 pm UTC, edited 1 time in total.

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Re: 0947: “Investing”

Postby Yakk » Tue Sep 06, 2011 2:09 pm UTC

augurey wrote:
Cecil wrote:
augurey wrote:Who considers a savings account investing? At 8% you're at 2,158 after 10 years -- more if you reinvest your dividends.
What are you investing in that grows 8% and also provides a steady dividend?
8% is roughly the rate of return for the DJIA -- if that included reinvesting dividends I don't recall.

1 year return on DJIA: 10,321.84 to 10,975.52 = 1.063329793912713237174767289553, or 6.3%.
Most recent inflation figure: 3.6287%
Return after inflation (last year): 1.0260958536705692893713491431939 (return / (100%+inflation)), or 2.6%.

2 year: 11464 down to 10975. Negative 4.27% return over the last 2 years, annualized to -2.16%. Before inflation. About 2.6% inflation over this period, brining your annual losses to about 4.8%.

10 year: 9950 up to 10975. 1.1030150753768844221105527638191, annualized to 0.99%. Over that decade inflation came to 27.6%, or 2.5% per year, giving a real rate of return of -1.4%.

Lets go back to the 70s. Dec 1971 the stock market was at about 860. 10975/860 = 12.761627906976744186046511627907, ^1/40 = 1.0657311305881984681388690572487. Inflation over those 40 years was 457.8%, or 4.4% per year. This gives a 2.1% real rate of return since 1971 from investing in the DJIA.

8 percent return? After inflation (because, honestly, the only thing pre-inflation numbers are good for is deciding if the stock market is better than a mattress)?

That presumes that your investment occurs over a period that an industrial revolution is occurring. 8% growth rate is unsustainable, because at that rate we'll run out of matter to turn into computronium in a century or two. Or you are investing in a bubble (like the 90's or the 20's).

A 2% rate of return is pretty good. A 1% per capita increase in GDP per year means that over 200 years, people become on average 7 times better off. That's the difference between a first world nation like the USA, and Afghanistan (or, quite honestly, the USA of ~1811). Toss on a 1% growth rate in the population, and capture every single drop of economic growth in your investment, and you have a 2% annualized rate of return right there (after inflation).

Expecting a rate higher than that is probably unwise.

A 8% rate of return on a 1% per year growing population is a 7% per year increase in wealth per person. Over 200 years that is a 750 thousand fold increase in wealth per capita, or the creation of a slave-state where almost all of the wealth of a society has been transferred to whatever investment you picked and everyone else is living in bondage (which probably wouldn't be enough!)

When someone tries to sell you an investment that grows at 8% per year, and implies that anyone could make this investment, and that it is a (relatively) sure thing, they are not telling you the truth. They might be mislead: but more likely they are trying to sell you a pig in a poke and skimming their 1%-10% off the top.

...

Oh, and you could time the market. Timing the market is like playing a roulette wheel -- it is easy to say "had you bet on 00, you'd be rich". And there are people who have struck it rich playing roulette. Very few people have ever struck it rich by timing the stock market with their own money.
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Re: 0947: “Investing”

Postby Dason » Tue Sep 06, 2011 2:59 pm UTC

miraclef wrote:
Maxpm wrote:
miraclef wrote:
Matt228 wrote:I registered just to point out that 1,219 looks a lot like 1,279 when hand written. This is the reason I cross 7s.


There's no excuse not to cross your sevens but look at how he normally writes "1".

I still don't understand how Randall got something wrong kids are taught at age 14...


Handwriting isn't something you can "get wrong." One's handwriting might be messy and ambiguous, sure, but it's not "wrong."


It's obviously not a handwriting issue. Even he wouldn't try to claim that.

He never writes his 1s as anything but a single stroke.

1) Make an outline of the comic quick
2) Copy it into finalized form while misreading a single number

I thought it was pretty easy to see how he could make a mistake like that. I know I misread my handwriting sometimes especially when it comes to numbers.
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Re: 0947: “Investing”

Postby ChurchSkiz » Tue Sep 06, 2011 3:39 pm UTC

Taking an inflation adjusted return from the DJIA and then making the argument that investing isn't all that great is intellectually dishonest. In that case, you need to be comparing not the difference between 0% and the inflation adjusted return, but the negative return from inflation (ie -3%) and the inflation adjusted return.

So for example, if the DJIA provides annually a 5% real return, you didn't get 5% of return. If you had left your money in a matress you would have "lost" 3%. You need to compare 5% to -3% which is still 8% of net gain. This is why when looking at returns you shouldn't care about inflation adjustment, because inflation takes the same amount from everyone regardless of their investment class (including mattress stuffing). Inflation adjustment should only matter when discussing retirement planning, because the money you have in 30 years won't be worth as much and you'll need to know how much money you "should" have to compensate for that.

Another way of putting it, a ten year note might get you 2%, but that's 2% more than you'd have if you left the money in a safe in your closet. You might even be down 1% in real money because of inflation, but you're still going to have 2% more than if you left the money in a safe in your closet.

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Re: 0947: “Investing”

Postby sarysa » Tue Sep 06, 2011 3:48 pm UTC

mania wrote:
iChef wrote:I've gotten into this argument many times with family members that insist on playing the lottery (The state tax on people who are bad at math).


For many, lottery is the only chance they'll ever be truly rich. [...] To ignore both the "fun factor" of gambling and the dream of one day to be living the life of luxury, you've just ignored the entire point of the game. And it is that - a game, a form of entertainment.


I have to disagree with these combined statements. The false hope that the lottery provides (while taxing people who can't do math) suppress peoples' will to stand up and fix what's wrong with their lives. A good idea + entrepreneurial spirit + the willingness to make sacrifices + a much smaller bit of luck (than the lottery, for sure) is one of many ways people could attempt to dig themselves out of a hole.

I don't find the lottery to be fun. I look at it and think "well this is BS." Pay-per-bid auctions may be the only statistically worse form of gambling than the lottery. Also, those who are over the hill who regularly contribute to the lottery seem to see it more as a subscription or tithe than an endorphin rush at that point of their life.

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Re: 0947: “Investing”

Postby A_of_s_t » Tue Sep 06, 2011 3:58 pm UTC

karanj wrote:
A_of_s_t wrote:For some reason, I always think compound interest is going to yield a crazy amount of money. Alas, I have the same faults as our stick figure protagonist.


It depends on your starting capital and rate of interest. If I was to put $20,000 at 6% (achievable here in Australia) compounding monthly, the return is $16,387 after 10 years. Annually, it's $15,817. Simple interest is $12,000 - so the difference adds up.

Now I just need to get $20,000... Ponzi schemes usually work, right?
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Re: 0947: “Investing”

Postby ethorad » Tue Sep 06, 2011 4:43 pm UTC

To those who claim the lottery is a tax on the bad at maths, do you buy insurance?

As an economist will tell you, people don't generally try to maximise their wealth, they try to maximise their utility (or "happiness"). As a function of money, someone's utility curve will generally be upward sloping - ie more money = more utility. However the utility curve isn't generally a linear function of wealth. For example, people can be risk averse such that -1 money causes more unhappiness than +1 money generates happiness. Also +1,000,000 can make them more than a million utility units happier than +1 money will since it will actually make a difference to their lifestyle.

Someone will therefore play the lottery if doing so increases their expected utility. In maths, for a p% chance of winning and a utility function u(wealth)

If don't play: utility = u(assets)
If do play: utility = p * u(assets - stake + winnings) + (1-p) * u(assets - stake)

Now lets add some numbers:
u(a) = 1000 say
u(a-s) = 999 as we assume that the change in utility for paying the stake is minimal
u(a-s+w) = 1200 as the winnings would enable them to buy a new car or pay for college
p = 1% as using 1 in 14million makes the numbers awkward

If don't play: utility = u(a) = 1,000
If do play: utility = p * u(a-s+w) + (1-p) * u(a-s) = 1,001.01

So while your expected wealth is lower your expected utility is higher. Therefore someone with the given utility curve would maximise their utility by playing the lottery. Note that this is the case no matter what the actual winning amount is, all I assumed is the values on the utility curve.

The "bad at maths" point comes in if you assume that someone is purely trying to maximise wealth - ie u(a) = a. Under that utility curve, the payoff on winning would have to be at least 1/p to make playing the lottery a gain - and in the UK I think the payoff is in fact only half of that.

Note that this is the same as buying insurance. In each case you pay a small amount in exchange for a chance of a larger payoff. In each case the payoff is less than implied by the amount paid and probability - lotteries don't pay all the income as winnings, and insurers have to make a profit. However people are happy avoiding a loss and so buy insurance. Just like lotteries, insurance can therefore increase your utility despite reducing your expected wealth.

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Re: 0947: “Investing”

Postby rcox1 » Tue Sep 06, 2011 6:25 pm UTC

unus vox wrote:
lalop wrote:
mania wrote:Now I'm not saying it's at all a wise investment decision, and I'm not recommending people play. But this "state tax on people who are bad at math", oft-repeated, I feel is incorrect. The players may have actually done the maths, worked out the $10 a week they're spending is not hurting them and the dream of one day having a lot of money (along with the very slim chance of it actually happening) is worth it to them.


So people are throwing money away to get an endorphin rush, and the state is cleaning up at the bottom. While, fair enough, what you do with your money is up to you, I would just think there are better ways to invest it. (Even if you invested in an xbox, for instance, you'd at least get the xbox back in return!)


If someone enjoys playing the lottery, it's not exactly money wasted. Just because you don't win doesn't mean it wasn't worth the shot for some people. If you can afford a few bucks a week, it's not exactly throwing away tons of money. To further your Xbox analogy, when you invest in a video game system, you're the only one reaping its rewards. But at least the money from lotteries goes somewhere. Especially in a nation where people are terrified of letting go of their money for the good of the public, and where the phrase "tax increase" is a political death sentence, it's nice to know we can play (yes, play) the lottery for public good. :D

I don't even play the lottery. Personally, I don't find it fun. But I have gone to casinos and done a bit of black jack. For me, that is fun, and I always go in knowing how much I'm willing to lose. In my estimation, money is only wasted if its rewards are (to the person) not worth its cost, and/or is being used in lieu of basic necessities.


Furthermore, if you got an XBox you would be advancing the technology of humankind. Games have always played a crucial role in development of technology. The earliest forms of the wheel have been found on what were most likely toys. Most consumers would balk at spending $1000 on a computer that is used to do work, but routinely spend at least that much on gaming computers. In addition, games do not have the added need to be highly reliable or useful.

In Texas the lottery is pretty much a stimulus program. It keeps convenience stores open, provides government jobs for low level bureaucrats, and provides the increasing useless TV news programs nothing to report. The spending on education, which was supposed to increase, has consistently decreased as a percentage of the state budget. The federal stimulus, which was also supposed to use to finance education, was also mostly used to pay state bureaucrats or provide bribes to Perry contributors.

Casinos are different as the odds tend to be better than the Lottery, and there is some entertainment value. The problem is that conservatives tend to dislike the free market typified by casinos while favoring government expenditures as long they can claim they are not funded by taxes.

Lottery, like taxes, tends to reduce the money in the economy while increasing the number of desk jobs of questionable value.

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Re: 0947: “Investing”

Postby Yakk » Tue Sep 06, 2011 6:55 pm UTC

ChurchSkiz wrote:Taking an inflation adjusted return from the DJIA and then making the argument that investing isn't all that great is intellectually dishonest. In that case, you need to be comparing not the difference between 0% and the inflation adjusted return, but the negative return from inflation (ie -3%) and the inflation adjusted return.

That assumes your unit of valuation is "pieces of paper called dollars". Over time, this is a poor unit of valuation, because knowing you have 1 million pieces of paper with the word dollar on it in 20 years doesn't mean much if you don't know what you can do with those pieces of paper.

If the paper is only worth burning or using as bedding, that is a very very different situation than if they have roughly the same value as what you would imagine 1 million pieces of paper today would be worth.

So you could have an economy with 100% return per year -- but the money is worth 100% less. And that wouldn't be an example of "the most powerful force in the universe", because other than providing increasingly cheaper firestarters, that interest isn't that useful.

The decision to save or spend and the like is mainly about what you can get for the money later instead of now, rather than how many pieces of paper you'll have.

There are a number of ways to defeat inflation, including "buying what you'll need later now, and storing it", so treating "holding cash" as the baseline is relatively silly.
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Re: 0947: “Investing”

Postby mania » Tue Sep 06, 2011 6:57 pm UTC

sarysa wrote:
mania wrote:
iChef wrote:I've gotten into this argument many times with family members that insist on playing the lottery (The state tax on people who are bad at math).


For many, lottery is the only chance they'll ever be truly rich. [...] To ignore both the "fun factor" of gambling and the dream of one day to be living the life of luxury, you've just ignored the entire point of the game. And it is that - a game, a form of entertainment.


I have to disagree with these combined statements. The false hope that the lottery provides (while taxing people who can't do math) suppress peoples' will to stand up and fix what's wrong with their lives. A good idea + entrepreneurial spirit + the willingness to make sacrifices + a much smaller bit of luck (than the lottery, for sure) is one of many ways people could attempt to dig themselves out of a hole.


I do understand what you're saying - and I agree, many lottery players do have real problems that by all accounts need to be addressed.

But see, to me, lottery makes a lot more sense than other forms of gambling. Any gambling that will not change your life if you win, to me, is a "tax on those bad at maths". ie roulette, blackjack (card counting excluded), etc - unless you bet a huge amount to begin with - a win is not going to appreciably change your life. And if you bet a huge amount at the start, you really do fail at math because odds are you're going to lose everything.

Likewise scratchies/instant lotteries make no sense to me, because the most you can win on most cards is not much more than a new car. Not appreciably life changing. So you're effectively reducing your money for only the satisfaction of scratching a card, whilst possibly (with low odds) winning a non-life changing sum of money.

By comparison "the lottery" - with a small amount of money spent, one less takeaway meal a week, can (with very low odds) change your life, give you something you could not have possibly achieved through any other means. So provided someone is only spending a small amount on the lottery and isn't putting themselves out - I lest not judge. Because I can see some rational sense in it. Effectively, they're saying having 10 million bucks would be worth 10 billion happiness, whilst having $10 is worth just 10 happiness. With those figures, it's worth spending $10 for a shot at the 10 million. Who am I to argue with that? Who am I to tell them that having 10 million bucks won't bring them as much happiness as they imagine it would?

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Re: 0947: “Investing”

Postby Faranya » Tue Sep 06, 2011 7:07 pm UTC

iChef wrote: (The state tax on people who are bad at math)


See, I always had a problem with people making statements like that. By that logic, anyone who spends disposable income on something they find enjoyable is "wasting" their money...
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Re: 0947: “Investing”

Postby Yakk » Tue Sep 06, 2011 7:52 pm UTC

mania wrote:give you something you could not have possibly achieved through any other means.

Is that true?

Lets start with a very rough model -- I'm well aware that this isn't precise, but I'm using round numbers to look at the problem.

A 1 dollar ticket giving you a 1 in 100 million chance at 10 million dollars. Repeated at least once per week for 10+ years (as the majority of lottery tickets are sold to people who buy regularly, right?)

1E7 return with 1E8 expected cost. 10 years times 52 weeks is 520$ seed capital.

Can you beat that using less punitive tools? We could start with a hypothetical roulette wheel with no cap, 36 numbers, and a 35:1 return. The player puts 1$ down, and lets it ride 5 times.

35^5 = 52,521,875-fold return. Odds are 1/36^5 = 1/60,466,176. So here we have a 52 million dollar payout for 1$ with a 14% expected loss. This far beats my model.

A 37 number wheel (which are more common) reduces the winning chance to 1/69343957, or a cumulative loss of about 25%.

So playing the lottery is worse than putting 1$ down on a roulette wheel and letting it ride 5 times, assuming you can find such a wheel. Practically, what you could do is find an easy-to-find wheel with a low cap, if you win then expend some resources to go to a higher cap wheel, etc, until you end up putting a million down on a wheel in spain or vegas. (Note that while it seems wasteful to throw a million dollars down on a roulette wheel, this plan is on average less wasteful than buying a lottery ticket as a plan to be a millionaire)

I guess the advantage of the ticket is that it sort of sucks, so you are less likely to get addicted than in a casino.

Now, starting with as little as 520$, it is hard to get enough leverage to hit millions without some form of gambling. But one could imagine an initial gamble for seed capital (without the million-dollar payout), then a heavily leveraged (and hedged) stock market buy, might be possible?
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Re: 0947: “Investing”

Postby BrianB » Tue Sep 06, 2011 8:06 pm UTC

rcox1 wrote:
.... The federal stimulus, which was also supposed to use to finance education, was also mostly used to pay state bureaucrats or provide bribes to Perry contributors.
....


Sir, you realize making that statement is a civil tort, right?

In Texas, a person who is a "public figure" must prove that the defendant acted with "actual malice" when making a defamatory statement. "Actual malice" is defined as making a defamatory statement while knowing it's false or with reckless disregard as to whether it's false or true.

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Re: 0947: “Investing”

Postby EvanED » Tue Sep 06, 2011 8:48 pm UTC

ChurchSkiz wrote:Taking an inflation adjusted return from the DJIA and then making the argument that investing isn't all that great is intellectually dishonest. In that case, you need to be comparing not the difference between 0% and the inflation adjusted return, but the negative return from inflation (ie -3%) and the inflation adjusted return.
...
Inflation adjustment should only matter when discussing retirement planning, because the money you have in 30 years won't be worth as much and you'll need to know how much money you "should" have to compensate for that.

I disagree.

Or rather, I agree with most of what you said but disagree with the fundamental assumption. If you're sitting around figuring out how much money you'll have in 10 years or whatever, why do you care what that number is besides what you'll be able to buy with it?

In other words, if you take a broader view than just "retirement planning" to extend it to "when I take the money out" (whether it be for retirement or a house or kids' college or whatever), then figuring out how much money you should have to compensate for inflation (or the flip, figuring out what you'll be able to buy with what you have) is the norm, not the exception.

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Re: 0947: “Investing”

Postby ChurchSkiz » Tue Sep 06, 2011 9:40 pm UTC

EvanED wrote:
ChurchSkiz wrote:Taking an inflation adjusted return from the DJIA and then making the argument that investing isn't all that great is intellectually dishonest. In that case, you need to be comparing not the difference between 0% and the inflation adjusted return, but the negative return from inflation (ie -3%) and the inflation adjusted return.
...
Inflation adjustment should only matter when discussing retirement planning, because the money you have in 30 years won't be worth as much and you'll need to know how much money you "should" have to compensate for that.

I disagree.

Or rather, I agree with most of what you said but disagree with the fundamental assumption. If you're sitting around figuring out how much money you'll have in 10 years or whatever, why do you care what that number is besides what you'll be able to buy with it?

In other words, if you take a broader view than just "retirement planning" to extend it to "when I take the money out" (whether it be for retirement or a house or kids' college or whatever), then figuring out how much money you should have to compensate for inflation (or the flip, figuring out what you'll be able to buy with what you have) is the norm, not the exception.


Because the underlying assumption is whether it's good or bad to invest in stocks/bonds/CDs/savings accounts. To say that it is not advantageous is to say that it is better to be doing something else. Unfortunately, no one ever provides the alternative, so the alternative to stock investing is sitting on cash, or buying useless junk. I agree with you, if you are focused on the end result "How much money will I have when I take this out?", then the question of inflation is important. If we are just discussing one investment vs another, in this case DJIA investment vs stuffing it in a mattress, the inflation question is irrelevant, you're going to lose money to inflation no matter what, so what does it matter how the gains are adjusted?

Again, I would say it is relevant if you are discussing spending vs saving, as Yakk is saying. But I never hear a good alternative to investment in the form of spending. Unless you are talking about commodities (ie Gold, silver, oil), or real estate. Neither of which is without risk. At the end of the day, all forms of returns are "risky" or else they wouldn't be investments. But there is also a risk of not investing, due to inflation, and a risk when spending now vs saving due to depreciation of assets.

If someone is aware of a no-risk retirement plan that involves spending all your money as you get it to increase net worth at retirement, please share it with us so we can implement immediately.

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Re: 0947: “Investing”

Postby gmalivuk » Tue Sep 06, 2011 10:10 pm UTC

ethorad wrote:using 1 in 14 million makes the numbers awkward
Yes, it would indeed be awkward for your argument if we made the probability realistically low...

If you assume the winnings could pay for college, let's call them $100k. Let's furthermore say that your present wealth is hovering at about $10k, because it's usually not really wealthy people who play the lottery. Let's say a ticket for this lottery costs you $1 and your chance of winning is 1 in 200,000. Let's further assume that utility is based on the multiplicative change in your wealth. (In other words, say u(a) = log(a). So doubling your money and halving your money are equal and opposite changes in utility, and the benefit of each additional dollar decreases as you get wealthier.)

Not playing this lottery involves no change in utility. Playing has an expected change in utility of log(110000/10000)*1/200000+log(9999/10000)*199999/200000. Which is slightly negative.

And in fact, for any well-designed lottery (i.e. with negative expected change in absolute wealth), this kind of utility will always be negative. Because being well designed means p*jackpot is less than the cost of the ticket. And because the value of each additional dollar is less than that of the one before it (for any utility function with diminishing marginal utility, which is to say pretty much any reasonable one), this difference is *greater* for a concave utility function than for a linear one.

(Note that buying insurance is the opposite: yes, you still have a negative expectation of wealth, but a positive expectation of utility, because losing a given amount of money is a greater change in utility than gaining the same amount of money.)
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Re: 0947: “Investing”

Postby Yakk » Tue Sep 06, 2011 10:28 pm UTC

The real trick is when the utility function is super-linear.

Then playing the lottery (with its negative payoff) can have a positive utility outcome.

An example of when a utility function is super-linear is when you are starving to death. Each day you eat a loaf of bread is another day you live. You have 1 loaf of bread to last you for a month, after which you expect to have food again. A 1/50 chance to get 30 loaves of bread from that 1 loaf could easily be worth it, as the options are (live 1 day) vs (live 30 days, and then indefinitely) based on your current wealth.

So you might imagine a really lucrative investment (like going to school) might seemingly be worth the risk, especially if your only access to capital is in the form of extremely high-interest loans.

Both of these require a high-return high-capital investment, where the alternative capital sources are absent or even more expensive than the lotto.
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Re: 0947: “Investing”

Postby gmalivuk » Tue Sep 06, 2011 10:36 pm UTC

True. There are some rather unlikely cases where the utility of a specific sized jackpot is exceptionally high due to specific external factors.

I doubt that's often the case for most people who play the lottery, though, if ever.
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Re: 0947: “Investing”

Postby EvanED » Tue Sep 06, 2011 11:04 pm UTC

ChurchSkiz wrote:Because the underlying assumption is whether it's good or bad to invest in stocks/bonds/CDs/savings accounts.

Whoa, back up. First of all, if you properly adjust for inflation in both measurements, this doesn't matter much. Let's use Yakk's 40-year figures, which I'll take as accurate. (Doesn't much matter whether they are.)

Does it make much of a difference to say "if you invest, you'll get 6.3% return, and if you put it into a mattress you'll get 0% return, and if you put it into a savings account you'll get 1% return [or whatever]" vs "if you invest, you'll get 2.1% return, if you mattress you'll get -3.6% return, and if you put it into savings you'll get -3% or whatever return" (too lazy to compute the last figure).

If you want to know which is best, they come out in the same order. If you want to know by how much it's the best, the latter numbers are what you want to look at anyway.

To say that it is not advantageous is to say that it is better to be doing something else.

Second of all, I don't think Yakk ever said that you shouldn't invest, or it wasn't advantageous. He was just pointing out that the real rates of return of investing is rather lower than most people would assume.

The closest he comes is in the next post a while later when he says "There are a number of ways to defeat inflation, including "buying what you'll need later now, and storing it", so treating "holding cash" as the baseline is relatively silly."

gmalivuk wrote:True. There are some rather unlikely cases where the utility of a specific sized jackpot is exceptionally high due to specific external factors.

I doubt that's often the case for most people who play the lottery, though, if ever.

You edited the part of your previous post that I was going to quote, so I'll just reply here. :-)

I don't think you have to go to extremes to get super-linear utility, like Yakk did. I view the utility curve as a bit wavy... there are some points where you have enough money to do something entirely different, and then it jumps up a lot, then flattens back out. For instance, if you suddenly have enough money to afford a down payment, you can get a house: that's a lot of utility for a potentially incremental increase in amount of money. (At least assuming you value that sort of thing; I know some people don't. I, for one, very much look forward to that day.)

Or suppose you think it would take x amount of money to retire at a comfort level you'd be happy with. utility(x) would be a lot more than 2*utility(x/2), don't you think?

Sure, overall the utility curve is sublinear, but there are a lot of sort of "local maxima" in it. (Really, large local maxima in the derivative.)

TL;DR: the lottery is a tax on people who are bad at math in the sense that a lot of the people who play the lottery really probably shouldn't be, but it isn't in the sense that it is entirely possible to play it and be completely rational.

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Re: 0947: “Investing”

Postby Chrisfs » Tue Sep 06, 2011 11:30 pm UTC

Kaijyuu wrote:I'll just pipe in and say that rich people are rich because they spend their time and money in such a way as to make the most money possible. Buying a lottery ticket is not one of those ways, but then again neither is taking a day off, having a family, spending the weekend playing a good RPG, or anything like that.


That's somewhat of a fallacy. It assumes that everyone starts out with the same amount of money at birth (or age 18).
Some (possibly most) rich people start out rich, have access to better schools, and better jobs through connections, and in some cases, can spend large amounts of money frivolously, as they are simply living off returns on a very very large amount of money.

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Re: 0947: “Investing”

Postby ChurchSkiz » Wed Sep 07, 2011 1:50 am UTC

EvanED wrote:
To say that it is not advantageous is to say that it is better to be doing something else.

He was just pointing out that the real rates of return of investing is rather lower than most people would assume.


Exactly, rather low only compared to 0%, not to the difference in doing nothing. If I have a 100% return, but inflation is 98%, saying that I really only got a 2% return is kind of dumb. If I hadn't invested, my money would have devalued by almost half.

The closest he comes is in the next post a while later when he says "There are a number of ways to defeat inflation, including "buying what you'll need later now, and storing it", so treating "holding cash" as the baseline is relatively silly."


That sounds great, but practically what does it look like? What are examples of things you can buy now that you would need after retirement? Food? Water? Electricity? Housing? Fuel? Electronics depreciate quickly and may be outdated in 30 years. Real estate is probably a solid investment but definitely not without risks as we have seen recently. Commodities are also not without risk and mass storage is impractical or has a cost to bear. Food and water have limited shelf lives. Also, it says nothing of the risk of these type of investments. If you buy $1000 worth of water and 20 years from now you could have bought twice as much, you would have been better leaving the money in the mattress.


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