Document Sample
Contracts Powered By Docstoc
					Why isn’t investing
just like betting?
Financial Management
Betting is a win/lose activity

 Suppose you and I bet on a baseball
  game or a card game
 One of us will win
 One of us will lose
 The winner will win exactly as much
  as the loser loses
 The sum of your and my fortunes is
Business is a win/win activity

 Suppose I pay $20 for a haircut
 I think the haircut is worth more than
  $20 (or wouldn’t get it)
 The barber thinks $20 is enough pay
  (or he wouldn’t do it)
 We both got more that we gave
     I.e. we both came out ahead
     This was a win/win deal
Other win/win activities

   I lend you $500 at 5% interest
       I think 5% is worth not having my money for a
        while (or I wouldn’t do it)
       You think the money is worth more than 5% to
        you (or you wouldn’t borrow)
       This is a win/win deal
   You rent an apartment from me for $900/month
       Having the apartment is worth more than $900
        to you (or you wouldn’t rent it)
       $900 is enough money for me (or I wouldn’t rent
        it to you)
       This also is a win/win deal
Investing in win/win vs.
   You are not likely to make money
    investing in win/lose deals
     You will win sometimes
     You will lose sometimes
     They will tend to balance out
   You will make money investing in
    win/win deals
     Win/win deals create value
     The investor gets a portion of the value
Lottery Tickets

 Are lottery tickets an investment?
 No
     They are a win/lose deal
     Actually it’s worse than that
   Lotteries are fund raisers for the state
     The winnings they give back are only
      part of what people pay for tickets
     So you are likely to get back less than
      you put in

Shared By: