Are you Gambling to be Rich or to be Excited?
Gambling comes down to risk vs. reward, but the motivation subconsciously is usually the pursuit of excitement. Its true that life is a gamble - you take a gamble crossing the road, but the chance of you getting hurt normally very low (unless say you decide the run across a busy freeway - which would be more exciting, and much more risky).
Consider two versions of your future self; You #1 plays a video game for excitement, and saves money in an interest bearing bank account (or in a Dow Jones ETF in the stock market to get a higher return). You #2 goes to the casino, and excited by the flashing lights, sounds etc, puts the money he gets into the poker machine, but it doesn't last long. Both get the excitement buzz, but You #1 has a growing bank balance over time, whereas You #2, has lost all his money (and probably any relationship you had at the start).
As a cab driver once told me whilst in Las Vegas, 'this place is built on losers' - check out the movie 'Owning Mahoney' to see what he meant - it can drive you to crime.
Of course you don't need to go to Las Vegas to loose your money. But when we loose, its can be so tempting to go back and try again, and should we win, its not uncommon for us to think we've become 'lucky' play all the money, loosing everything (Gambler's Fallacy). Note that loosing can be almost as exciting as winning - it seems to be an instinct we have from our hunter/gather past (our mind encouraging us to go out and take take risks to hunt for prey).
So how can you win. Well lets have a look at a few ways you can loose first:
- Gambler's Ruin; used by statisticians, this is where you have less money than the person you're gambling with. Even if you have a 50:50 chance of winning, which is rare, over time the person with the most money will always win.
- Gambler's Fallacy; this is where you are 'on a roll', thinking you'll keep winning because you have been winning in each game in a row - you feel you've become 'lucky'. Statistics will tell you however, that you can randomly win game after game, but that has no impact on the outcome of the next roll of the dice.
So how can you win? It comes down to the game you choose to gamble in. Consider:
You play a number of an American Roulette Wheel; there are 38 slots numbers on the wheel, two are numbered zero and can't be used be bet on, so the chances of winning are 1 in 37, but the winnings will by 35 times your wager. As they don't give you 37 times your wager, they win on the odds. They also win over time because they more money than you do (Gambler's Ruin). If you loose, you loose all your money, and you can't wait for luck to change.
- Binary Options
You have a binary options account and trade the financial markets on your mobile phone. You bought a binary option for the Euro for it to be above say 1.06 US Dollars at 12 Noon (the price it is at the time you bought the option). The option cost you $60 and you'll get $100 if it is above 1.06 US Dollars at noon. The chances of you winning are 50:50 (50%), but the payout will only be $40. Once that time passes, you've either won or lost. So as you keep 'playing' your more likely to loose all your money.
Value of Money
You may consider loosing $75 on lottery tickets, or poker machines is no big deal, as your take home pay is $750 a mere 10% of your salary, you still keep the remaining $675 right?
No, not right - if your living expenses (food, bills, mortgage repayments) are say $675 per week, then all your 'spare cash' was just wasted on a hour or so of excitement! Maybe you felt lucky but ended up loosing $150. It 'felt ok' because your weekly bill might be say $500, but once your utility bills come in a month later, your realize you've actually lost some savings (if you had any). Anyway, its best not to consider it 'spare cash', its 'investment cash' - cash that can be used to increase your wealth with saving/investments. You need to consider ways to keep it and grow it - you need to consider risk.
Ways to Win Gambling
Whilst psychologically loosing can be just as exciting as winning, if you're truly interested in making money you need to gamble in ways that your chances of loosing are much lower, and the rewards when you win, much higher. Consider:
- Working a second job - here you're trading your labour for money and the chances of not being paid are much lower than in a casino. Probability of getting paid, say 100:1, lower if you stay with the same paying employer.
- Selling something on eBay you don't use - here you're trading your possessions, the cost to advertise is very low, and you're more or less guaranteed payment (say 500:1).
- Renting out a room - here you're trading some space for money each week, the chances of the tenant not paying are extremely low. Even if they don't one week, a new person will most likely pay the following week. Probability say 50:1, but gets much better if you keep a paying tenant.
- Buy dividend paying stocks - If bank interest is too low, you may be interested in investing in a mix of blue-chip stocks (say via an ETF) in the stock market that pay a dividend, such as large utility companies. If the price drops, you have time for it to recover, unlike when you gamble with riskier methods - note this doesn't apply for single stocks which may never recover.
- Banking your Money - Keeping money in the bank may pay some interest, and it extremely unlikely that you'll loose it (say 1,000:1), even lower if you spread the money across different banks. If you can save 10% of your take home pay, you'll go places.
Say you reside in New York, and the family take home income is $758 per week (the median family income in 2015 after taxes). If you can save 10% each week ($75.80), and put it in a bank account - you'd have around $20,000 in 5 years - even more if you earn interest/dividends. If you'd been a riskier gambler, its pretty safe to say you'll have nothing to show for that $20,000 over the same 5 year period. I mean in practice, how many millionaires got there by gambling?
So play the low risk, high reward games of working, saving, selling and renting, and play a video game, watch cable TV, Netflix etc for a very low cost form of excitement. You'll sleep better each night, and help rather than hurt your relationships. You may even be able to use the saved money as a down-payment to buy property with one or two extra bedrooms you can rent out, further increase the size of your nest egg. Overtime you're wealth will increase slowly, but exponentially, and most importantly, your risks will be minimal!
Check out my Spare Cash Calculator to see how much money you can make over time by taking the low risk gambles mentioned above.