I was driving to work today and realized something kind of interesting.
People will talk about gambling in terms of game theory. Often times they will go as far as to claim that lotteries are for stupid people, and since casino odds always favor the house, gambling in a casino is universaly stupid too unless you’ve found a way to shift the odds in your favor.
However, I realized that a literal application of game theory to real life gambling is silly at best, and wrong at worst.
Here’s my reasoning:
a) Direct application of game theory assumes that monetary pay outs are linear, i.e. $1000 is 1000 times better than $1. However, this would only be true if your lifetime was infinite and nothing ever changed. First and foremost, growth rates on investments in real life are non-linear, and an inverstment of $1 would certainly have a growth rate lower than inflation. Second, since your lifetime is finite, you care about the gross growth amount of your investment almost more than the amount of investment itself. Having a $1,000,000,000 in general deposit accounts will yield a lot more interest than having $1 in a deposit account. Since you only have a few years to live anyway, $1,000,000,000 turns out to be a much better thing to have than something that’s a 1,000,000,000 times better than $1.
b) It also assumes that loss value is also linear. Losing $1 1000 times is the same as losing $1000. However, since life is finite, losing $1 1000 times is a much better loss than losing $1000 once. Interest and appreciation for one, emotional effect as well. Also wealth has uncertainty, and small amounts are within that uncertainty. In fact, it can be argued that spending less than a certain percentage of your net worth is equivalent to spending nothing. Since spending requires an action, an action that is going to psychologically be compensated somewhere else (a smaller donation, smaller tip, cheaper purchase option, shorter phone call, etc.)
c) It assumes time is worthless. When you gamble, you spend time doing so that could be spent making money (or not).
d) It assumes enjoyment derived from gambling is worthless. For a lot of people, gambling is the past time they need to get away from it all, without which they would require health and travel expenses that could be greater than that of gambling losses.
Cheap, fun gambling is profitable even if odds are in favor of the house. Yes, this even applies to lotteries, because the $1 spent on a lottery is essentially $0, yet the jackpot winnings will change your life.