Before rushing to become the next bitcoin millionaire, let me share what I learned about risk from a compulsive gambler many years ago. 

Most people who read my columns are probably looking for information on the energy sector. However, I sometimes write about other topics, including investing and personal finance. Today’s column falls into those categories.

Years ago, I worked for a man who liked to gamble on NFL football games. He put down thousands of dollars on games every week, but I watched him make logical errors that are often made by stock market investors.

Most notably was his failure to appropriately recognize risk and reward — a common issue with gamblers. He would rationalize that he almost went the other way on the bet, which tended to downplay his risks.

He would bet more than he could afford to lose, which sometimes worked out. But in the long run, it didn’t. Eventually, if you take those kinds of risks, you lose.

How Random Chance Can Fool You

My boss would pay for hot picks from “experts.” At one point, I recognized that he was probably falling prey to scams that work something like this.

A “guru” with a “system” sends out letters to 1,000 known gamblers. He gives his “Lock of the Week” on a particular NFL game. The heart of the scam is that he picks one team to win in 500 of the letters, and the opposite team in the other 500.

The next week, he repeats the process only with the 500 people who received the correct pick the week before. At the conclusion of the second week, 250 people have received an accurate pick.

The third week, the guru begins to heavily promote a paid service, while giving a final “Lock.” After the third week, 125 gamblers have seen the service accurately pick three straight football games.

Confusing Luck With Skill

A gambler may reason that the odds of accurately picking three straight games are low (12.5%), so perhaps this guru indeed has an edge. The appearance of success makes it far more likely that the gambler will cough up money to get next week’s pick.