Is wealth an illusion? how to break free from the gambler's fallacy

Understanding the addictive nature of risk and why we chase quick wins over long-term wealth

Without a foundation of financial literacy or a society structured to counter our primitive survival instincts, we tend to gamble our way through life, searching for a windfall or wishing we had one. We share in the gambler’s fallacy that an event that has happened repeatedly must indicate that a different event is imminent. You’ll be the one to break the streak of unhappy consumerism—it’s not called retail therapy by accident. Sure, you’ll fail a few more times, but eventually your startup will win big! Of course, you’ll be miserable in your job a few months longer, but then it will get better. All you know is you can’t stop flipping that coin, or what would be left of life?

If you don’t have the financial literacy and money management skills to match, not even winning the actual lottery is a solution. Believe it or not, statistics show that 70 percent of lottery winners end up broke, while a third go on to declare bankruptcy in the three- to five-year period following their windfall. How can this be? Runaway spending, toxic investments, and poor accounting can burn up even the biggest windfalls in next to no time. (Isn’t it ironic that anyone can buy a lottery ticket but not everyone has access to investments? Investing the same amount that one might spend on lottery tickets would easily yield a decent return over a 40- to 50-year period).

There is a reason we like to gamble. Various studies have shown that the dopamine hit we get just as we’re about to find out the result of our gamble is extremely addictive. Unsurprisingly, companies prey on these chemicals to keep us hooked.

TED Video: The psychology behind irrational decisions

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine” — Benjamin Graham (Warren Buffet’s mentor)

History has shown that the only way to build wealth is via long-term discipline. So why do people try to time the markets? Because we apparently have an primal urge to make quick money. Instead of investing for the long term, we try to time the markets to get that dopamine hit that comes before the win. Unfortunately, 80 percent of us lose money, on average, when the results come out—all while thinking we are smarter than others for watching those market shows or that it will somehow magically work for us next time (the gambler’s fallacy).

No doubt, the GameStop/Robinhood story was a thrilling ride for those participating and entertaining for the public at large, but what transpired was not very different than going to a casino. Retail trading, and buying and selling shares, is a mugs game.

Any financial guru worth their salt will tell you to auto-invest passively for the long term.

With gratitude,
Arunjay.

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