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Understanding gambling

The key aspect of gambling is the negative mathematical expectation (designed as the weighted average of all possible outcomes). Risk is inherent in many aspects of life. We do accept small negative expectation when we cross a road or board a flight – the number of accidents is not zero, so the expectation is negative. If you want zero risk, it is impossible to get out of the house, or even stay in the house. There is always some risk, whether you are staying put, or on the move.
Why would someone accept a (large) negative expectation, such as when they visit a casino? It is because they do get something in return – the thrill. Gamblers show similar responses to drug addicts. The drug is produced within the body, but it is not less addictive. Across Asia, many governments want to start selling this drug. They know it is not a noble thing, so they all say they will sell it only to foreigners. That is official drug dealing. Remember governments also collect taxes on tobacco and alcohol, so it is not a complete surprise.

There is an entire business where the thrill is balanced with the economics of the business. Some punters lose 100% of their bets, but the business won’t survive on a 100% win ratio for the casino. Casinos make 3-5% on all bets, that’s what pays the bills. Just like Jean-Baptiste Colbert’s observation on taxation, the art is in getting the largest amount of feathers from the goose with the smallest possible amount of hissing. Unlike taxation, the rates are regressive – the richer customers pay a smaller percentage.
Investing in high-yield instruments involves being in an area of over 2% defaultrisk. Is this dopamine-seeking behaviour as well? Not all high-yield is risky and reckless, there are ways to control the risk-reward for those in the driver’s seat, especially in a bankruptcy proceeding, because a court-approved plan has the force of law – it has to be done that way. When the global cost of capital was lowered post-2008, all capital-intensive industries saw too much capacity expansion – oil well, coal mines, iron ore mines, even potash mines. Now the bill is coming due.

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