The other day, I noticed a group of people (from the lower middle-class at best) huddled in a corner of an open field playing cards for stakes. Rationally, such people should not waste their money gambling. Yet, they do. And so do many others in the stock market. Why do people take high risks when they can least afford it?

Take the instance of the gambler. He initially plays for fun. But when he loses, emotions are high. For one, losing money hurts the ego. And two, it causes regret. The gambler, hence, bets even more in the hope of recovering the lost money.

Stock market traders are no different. Day traders who lose money in the morning typically make risky bets in the afternoon in the hope of recovering losses.

Tough choices

It appears that we are hard-wired to behave this way. Consider a person who is poor and has just lost a job. Suppose this person has two choices - to get a job with a salary of Rs 3,000 per month or to gamble for a cost of Rs 200 in the hope of getting Rs 5 lakh or nothing. Which do you think he will prefer?

Logically, the poor man should prefer the job that pays Rs 3,000. But it is highly likely that he may prefer the risky option. Why? The poor man realises that a stable income can keep him alive but cannot elevate his standard of living. The risky option could possibly lead him to a comfortable lifestyle and he is willing to take the chance!

This, perhaps, explains why the poor buy lottery tickets more often than the rich do, even when the money can be spent to feed the family. Worse still, those who are older tend to prefer lottery-like payoffs more than the young do, as the former have less time to elevate their social status.

Our behaviour shows that we are not truly risk averse. When we believe we are in a do-or-die situation, we typically take a big risk.

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