Nassim Taleb, author of Fooled By Randomness and The Black Swan, talks with EconTalk host Russ Roberts about antifragility, the concept behind Taleb's next book, a work in progress. Taleb talks about how we can cope with our ignorance and uncertainty in a complex world. Topics covered include health, finance, political systems, the Fed, your career, Seneca, shame, heroism, and a few more.
As a professional investor, many people assume I am opposed to casinos, the lottery, and racetracks. However, I believe speculative gambling can serve positive role in an individuals money psychology.
The fact is, many people are wired to love risk-taking. They get a rush, a thrill, from buying a lottery ticket or doubling down on a blackjack hand. All these things, done in moderation, are entertainment and should be viewed as such. Granted there are many people who legitimately have a gambling problem, and should never engage in these activities. I am addressing the vast majority of people who can walk away from the table any time they wish.
Indeed, all casino games have a negative expected value. That is, if one were to play them over and over, you would almost surely lose money. Given the nature of these games what good can they serve? The answer can only be understood if you understand the way people think and feel about money. There is a whole branch of academic research dedicated to "Behavioral Finance".
The real problem occurs when people seek this risk-taking rush with their investments. As investments, speaking of their retirement fund or their children's college savings. When a non-professional investor speaks about making big money in trading day trading options, futures, or forex, I just groan. They are trying to addresses that risk-taking, gambling instinct.
The key is to "scratch that itch" without making any lasting damage. You want buy a $1 lotto ticket? Go right ahead. You want to spend $20 on every single lottery drawing? Hold on a minute.
If one were to spend $100 on dinner and a show with their spouse, then what is the difference if they spend the same amount, but substitute a trip to the casino for the show?
Friends often come to me with a speculative investing ideas. When this happens I typically lay out the risks to them. After they grasp these risks, if they want to continue I encourage it. I warn them to allocate a small enough amount that:
"if that money disappeared tomorrow, you wouldn't care"
For most people, that dollar amount is a fraction of 1% of their net worth.
Real investing...prudent, planned, and informed investing, can be incredibly boring to the average person. Yes, in my office we have many computer monitors with fancy charts on them, but the fact of the matter is 99% of what I do is planning trades, and 1% is actually trading. Sometimes days go by without any trades at all.
Why would I do this, isn't it boring? If you are looking for a rush...yes it is boring. If you are seeking to make money, then it is the most exciting thing in the world.
The Wall Street Journal has a great article on on Ted Weschler, one of two new hires at Warren Buffett's Berkshire Hathaway. He got the job after twice paying $2.6M at a charity auction for lunch with Buffett.
Weschler is formerly a hedge fund manager with Peninsula Capital.
The other new hire is Tod Combs, who is formerly with Castle Point Capital.