MARKET WATCH by Karim Ghaidan
FX IS THE MARKET A LOTTERY?
Can a financial market investment be compared to a lottery investment? What are the similarities? Which is a better trade? Tis piece will try and analyze these and other hopefully interesting conundrums when comparing the two.
I have oſten been approached by friends/acquaintances asking me to buy a lottery ticket. Tis only happens when the potential jackpot is a big one, never when it is small. I have always declined much to the chagrin of the friend even though I explain it is not in their interest that I do so.
Why is it not in their interest? Te reason, whilst self-explanatory, is almost always never accepted.
Lottery vs Market Investment Investing in a lottery ticket is not
linear. A potential lottery jackpot can only grow if more investors invest in tickets. Tat is obvious. What is not obvious to my friend, the ticket holder, is the reason the jackpot is growing larger quickly is because the number of new investors grows exponentially and not linearly. In other words the number of new investors who participate do so at an ever increasing rate swelling the jackpot further and hence swelling the ranks of new players even more exponentially. Tis is the reason the size of the jackpot grows so obviously faster and bigger the closer we get to
the fateful day of reckoning when the numbers are finally pulled out of the hat.
Te end result of this mad frenzy of lottery ticket buying is that the jackpot in many cases ends up being shared amongst a number of winners, the same winners who would have made far more money not trying to entice me into buying a ticket.
So how does this relate to financial product investing? Obvious, it is exactly the same investor mentality that takes place.
FX TRADER MAGAZINE April - June 2016 79
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