Why do people take high risks even though they might lose their money?

Lately I’ve been grappling with a financial conundrum:” Why do people take high risks even though they might lose their money?”

Just last week I learnt about something called the “Money Game” among the Chinese speaking community in Malaysia. It’s a ponzi scheme, everyone acknowledges it as such, everyone who went in the scheme goes in with both their eyes wide open (or so they think), ready to lose their money, but hoping to earn more than they lose. Why is this so?

The educated and well to do didn’t fare much better, they went into something called “forex investment”, sometimes promising as much as 20% return a month. Again, eyes wide open (or so they think), preparing to lose their money for a chance to get much more than what they put in. Of course this is quite sophisticated, the brochure have lots of technical terms like moving averages and candlestick patterns. And the traders can be from fancy places like Singapore or even Europe. What is the attraction of such an investment?

Some real life cases too of property investments, notably guaranteed rental residential for US shale gas producers, residential apartments to ride on Brazil’s Olympic boom and even residential for Australia coal mining towns. Very high guaranteed returns, make back money within 3 years but until now still losing money. What happened?

At first I thought of one answer: “Greed”. But it’s an over-simplification. It happens to some people, but other people manage to avoid it.  If Greed is the answer, then it’s a human condition and everyone should be suffering from it. But it’s obviously not true. What is the difference?

I struggle with the question, perhaps didn’t even realize I struggled with it until I listened to a talk about us humans always wanting to test our boundaries. Once we got what we wanted or familiar with a a certain style of investing, perhaps with a safe kind of investing, we go to look for something… more. In essence, we want to keep pushing further and further and end up with a kind of investment which might lose us money, but the potential gains are “limitless”.

When posed against this kind of promise, whatever data that show “the house always wins” or “the expectation of a zero-sum game is zero” is kind of powerless. Facts and figures and years of research papers written amount to nothing in our eyes.  So how can we get out of this way of thinking?

It’s not easy, but it first comes with the realization of what does “limitless gain” mean? If we examined what we hope to accomplish with “limitless gain”, the answer is almost always the freedom from money worries. When questioned deep enough, no one actually make money for money sake. It’s always in service of the idea that with “enough money” we will be free to do whatever we like, to experience all that life has to offer without limitations.

But without realization, money can become an addiction which one can turn to more and more risky ventures. Because once they make their first million, they will think of their first billion, and then trillion, on and on. More often than not, people who gain their wealth thru luck or risky investments, only learnt the lesson that money can only be made thru luck or risky investment, thereby guaranteeing them to lose their money in a different scheme later in the future.

There is one reliable way to get out of this trap: first define what it means to be financially free, define in numbers and figures the lifestyle to be free of money worries. Then work out the returns needed to get there. More often than not, we will be surprised that our required rate of return is very much within the rate of return offered by stable and solid investments. Arm with this knowledge we can even make the decision to retire earlier or to pursue a lower paying job more in line with our interest and health. But first we need to really ask ourselves what are the numbers and the plan to get there. Then we can finally be financially free.

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