From Slowly Getting Rich to Rapidly Dropping to Zero: How the "Jackpot Trap" Consumes Your Wealth

Author: thiccy, Co-founder of Scimitar Capital

Compiled by: Felix, PANews

This article explores the shift in risk-taking behavior from pursuing stable returns to chasing big prizes, as well as its broader social implications. It will involve some basic mathematical knowledge, but it is worth reading to the end.

Imagine this: someone gives you a coin toss game like this. How many times would you toss it?

At first glance, this game looks like a money printing machine. The expected return for each coin toss is 20% of the net asset, so you should toss the coin an infinite number of times, ultimately accumulating the wealth of the world.

However, if you simulate 25,000 people each tossing a coin 1,000 times, almost everyone will end up with about $0.

The reason why almost all results go to zero lies in the multiplicative nature of this repeated coin tossing. Although the expected value of the game (i.e., the arithmetic mean) yields a 20% return per coin toss, the geometric mean is negative, which means that in the long run, tossing the coin actually results in negative compounding.

What is going on? Here is an intuitive explanation:

The arithmetic mean measures the average wealth created by all possible outcomes. In a coin toss game, the distribution of wealth is heavily skewed towards a small number of grand prizes. The geometric mean measures the wealth you expect to create in the median outcome.

The simulation diagram above illustrates the difference between the two. Almost all paths will lead to zero. In this game, you need to flip heads 570 times and tails 430 times to break even. After 1000 coin tosses, all expected values are concentrated on the jackpot outcome that accounts for only 0.0001%, which is the very rare case of continuously flipping a large number of heads.

The difference between the arithmetic mean and the geometric mean creates the "Jackpot Paradox." Physicists refer to it as the ergodicity problem, while traders call it volatility drag. When the expected value is hidden in rare jackpots, you cannot always "capture" it (achieve the expectation). Excessively chasing jackpots can turn positive expected values into a line approaching zero due to volatility.

The cryptocurrency culture of the early 2020s is a vivid example of the "prize paradox." SBF initiated a discussion about wealth preferences in a tweet.

Logarithmic wealth preference: Each additional dollar of value is less than the previous dollar, and as the scale of funds increases, your risk preference decreases.

Linear wealth preference: Every dollar is valued the same, regardless of how much you earn, and your risk preference remains unchanged.

SBF proudly claims to have a linear wealth preference. He believes that increasing from $10 billion to $20 billion is just as important as increasing from $0 to $10 billion, thus it is logical from a civilizational perspective to take risks on large high-risk investments.

Su Zhu of Three Arrows Capital (3AC) also agrees with this linear wealth preference and further proposes an exponential wealth preference.

Exponential wealth preference: Each additional dollar is worth more than the previous dollar, so as the scale of funds increases, the risk appetite also grows, and there is a willingness to pay a premium for substantial returns.

The following is the mapping of these three wealth preferences in the aforementioned coin toss game.

In light of the understanding of the "jackpot paradox", SBF and 3AC clearly chose to "flip coins infinitely". It was this mindset that led to their original accumulation of wealth. In hindsight, it is not surprising that they ultimately lost 10 billion dollars. Perhaps in a distant parallel universe, they are billionaires, which also proves the risks they took.

These failed cases are not just cautionary tales about digital risk management, but reflect a deeper macro-cultural shift towards a preference for linear or even exponential wealth growth.

Founders are expected to have a linear wealth mindset, taking on enormous risks to maximize expected value, becoming a cog in the venture capital machine that relies on the power law. Founders like Elon Musk, Jeff Bezos, and Mark Zuckerberg have given everything yet ended up as the richest people on Earth, and such stories reinforce the myth of the entire venture capital field, while survivor bias obscures the millions of founders who end up with nothing. Only a very small number of individuals can cross the ever-rising power law threshold to achieve redemption.

This preference for immense risk has permeated everyday culture. Wage growth lags far behind the compound growth of capital, leading ordinary people to increasingly believe that their best chance for true upward mobility lies in those lottery-like opportunities with expected negative value. Online gambling, zero-day options, meme stocks favored by retail investors, sports betting, and meme coins in cryptocurrency all demonstrate people's preference for exponential wealth growth. Technology has made speculation effortless, and social media spreads every new rags-to-riches story, drawing a wider crowd into a gamble destined to fail, much like moths to a flame.

The current culture is turning into a culture that worships "grand prizes," and the value of survival is decreasing.

Moreover, artificial intelligence has exacerbated this trend, further devaluing the worth of labor and reinforcing a winner-takes-all situation. The beautiful vision that technological optimists envision in the post-general artificial intelligence era, where humans will spend their time on art and leisure, seems more like billions of people chasing after negative-sum capital and status "jackpots" with universal basic income subsidies. Perhaps we should redraw the "upward" sign to reflect the winding road leading toward zero, which is the true outline of the "jackpot era."

In its most extreme form, capitalism behaves like a collectivist hive. The mathematical theory of the "paradox of the prize" suggests that it is rational for civilization to view humans as interchangeable labor, sacrificing millions of worker bees to maximize the linear expected value of the entire hive. This may be the most effective for overall growth, but it is quite unfair in the allocation of "purpose and meaning" (i.e., human pride and sense of achievement, etc.).

Marc Andreessen's declaration of technological optimism warns: "Humans are not meant to be farmed; they should be useful, they should be productive, and they should feel proud."

However, the rapid development of technology and the shift towards higher-risk incentives have pushed us towards the results he warned about. In the "Age of Big Prizes", the driving force of growth comes from the exploitation of peers. Utility, productivity, and pride increasingly belong only to the privileged few who succeed in competition. We have raised the average at the expense of the median, leading to an ever-widening gap in terms of liquidity, status, and dignity, giving rise to a multitude of negative cultural phenomena. The externalities produced by this manifest as social turmoil, starting with the election of populist politicians and ending in violent revolution, which comes at a significant cost to the compound growth of civilization.

As someone who makes a living trading in the cryptocurrency market, I have witnessed the decay and despair brought about by this cultural shift. Just like accumulating a prize pool, victory is built on the failures of a thousand other traders, which is a tremendous waste of human potential.

When industry insiders seek trading advice, they almost always find the same pattern. They take on too much risk and suffer significant losses. Behind this is usually a scarcity mindset at play, a sense of anxiety about feeling "behind," and an impulse to quickly profit.

In this regard, my personal answer has always been the same: rather than risking profits, it is better to accumulate more advantages. Don't push yourself to the brink just to chase a big prize. Accumulating wealth is key. Maximize your median returns. Create your own luck. Avoid losses. In the end, you will succeed.

But most people can never sustain an advantage. "Just win more" is not a scalable suggestion. In the fierce competition of technological feudalism, "meaning and purpose" always wins all. This brings us back to meaning itself; perhaps we need some kind of religious revival that combines ancient spiritual teachings with the realities of modern technology.

Christianity spread widely because it promised salvation for all. Buddhism, on the other hand, became popular with the idea that everyone can achieve enlightenment.

Modern religions must also do this, providing dignity, purpose, and an alternative path forward for everyone, so that they do not self-destruct in the pursuit of the grand prize.

Related reading: Don't be swayed by KOLs: You must have your own opinion when investing.