Suppose you win a lottery- a game that you typically avoid because you understand the odds of winning. If you are typical person, you will be most likely tempted to buy lottery ticket regularly thereafter!

We exhibit similar behaviour when it comes to our investments as well. What drives such behaviour? As humans, our life is governed by anticipation. So, looking forward to winning a lottery is exciting.

And so is realizing that expectation. Research in neuroscience has, however, shown that anticipating a win is more exciting than actually winning! Nevertheless, once you experience the excitement of winning a lottery, you feel the need to indulge. That is, your brain compels you to buy a lottery ticket, even though you are aware of the odds of winning the second time.

Odds of winning

This happens because we tend to use more of reflexive brain than reflective brain. The reflective brain performs calculation and helps you analyze and think. The reflexive brain helps you feel and is more intuitive. When you feel an urge to buy a lottery ticket, it is your reflexive brain that is pushing you to do so; your reflective brain is likely to tell you that the odds of winning are small.

Now, consider trading in equity options. You know that buying calls or puts has its risk, as options often expire worthless. Yet, we may choose to buy them regularly, especially if we have already experienced large gains from such investment; for, it is the reflexive brain in action. With investments, there is another factor at play. We know that options carry the risk of losing capital when our view on the underlying stock or index turns wrong.

The fact that we can lose money makes our experience of winning against such odds even more exciting! This is not so much true of lottery because lottery is a game of chance while investments, we believe, requires some degree of skill.

(The author is the founder of Navera Consulting. He can be reached at > enhancek@gmail.com )

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