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FOREX MARKET

Is the Market a Lottery?

Market, Lottery, Forex Market, investment, compared, fx trader, forex

Can a financial market investment be compared to a lottery investment? What are the similarities? Which is a better trade? This piece will try and analyze these and other hopefully interesting conundrums when comparing the two.

I have often been approached by friends/acquaintances asking me to buy a lottery ticket. This only happens when the potential jackpot is a big one, never when it is small. I have always declined much to the chagrin of the friend even though I explain it is not in their interest that I do so.

Why is it not in their interest? The reason, whilst self-explanatory, is almost always never accepted.

Lottery vs Market Investment

Investing in a lottery ticket is not linear. A potential lottery jackpot can only grow if more investors invest in tickets. That is obvious. What is not obvious to my friend, the ticket holder, is the reason the jackpot is growing larger quickly is because the number of new investors grows exponentially and not linearly. In other words the number of new investors who participate do so at an ever increasing rate swelling the jackpot further and hence swelling the ranks of new players even more exponentially. This is the reason the size of the jackpot grows so obviously faster and bigger the closer we get to the fateful day of reckoning when the numbers are finally pulled out of the hat.

The end result of this mad frenzy of lottery ticket buying is that the jackpot in many cases ends up being shared amongst a number of winners, the same winners who would have made far more money not trying to entice me into buying a ticket.

So how does this relate to financial product investing? Obvious, it is exactly the same investor mentality that takes place.

The higher the price a financial product goes the more investors it pulls in. This results in its price rising even higher until a buying frenzy materialises resulting in a near vertical, exponential short term upside explosion, similar to the huge lottery ticket buying that takes place in the final countdown.

Why does this happen? Again for the same reasons an ever increasing jackpot draws in exponentially greater numbers of lottery ticket buyers, hype, the media and participant greed.

The end result is also the same. The vast majority lose and only a handful end up sharing the gain.

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