What do Bitcoin millionaires, Newton and casinos have in common?

Newton quote

Congratulations, you’re a new Bitcoin millionaire. Or, maybe, not a new one, but a very lucky millionaire who saw the benefits of investing in cryptocurrencies soon enough. Your timing was perfect, and you’ve done something not many of us can actually pull off. Even less of us are capable of keeping such a jaw-dropping amount of money. You may ask, what does it have to do with Newton? Well, let us tell you a story.

Newton’s mistake

Once upon a time, Sir Isaac Newton was among the lucky investors who owned a share in “South Sea Company”..and then lost it all in no time.

The mistake made by the genius wasn’t new, nor uncommon, and will likely keep happening as the world stands. Newton couldn’t resist the temptation of investing bigger money in an inflated asset, despite the upcoming change of market sentiment. The bubble has burst, and Newton was left with nothing.

Back in 1720, Newton owned a share in one of the most promising companies in England. Sensing that the market is getting out of control, the scientist complained that he “can calculate the motion of heavenly bodies, but not the madness of people”, and sold his share. It was a great deal – Newton pocketed 100% profit and made 7,000 pounds.

But, just few months later, Newton joined the market enthusiasts and pupmed his savings back into “South Sea Company”. Needless to say, it was an extremely unlucky investment: the great physicist has lost 20,000 pounds, which equals $3mil today’s U.S. dollars.. Ever since then, nobody was allowed to mention the name “South Sea Company” when Newton was around. We can’t really blame him for that, can we?

Winnings can be a trap

Newton was without any doubt a genius, but his mistakes weren’t any different from what a “regular” human would have done in this situation. Finance experts who analyse human behavior claim to know why we act in certain ways. Their theory is called “mental accounting”.

Mental accounting affects us differently than traditional accounting. Casinos are a clear example of how we treat the money we gain from lottery winnings, successful bets or financial markets differently than our labor earnings.

We tend to assume higher risks with the money we won. If you take a closer look at a gambler who has just won some money, you may notice that he puts them in a different pocket than the money he brought with him. Such evidence proves that for him they have different mental value. There is even a special term for this kind of winnings – “house money”. It’s a part of casino slang where casino is referred to as “the house”. When gambling with the “house money”, you won’t treat it the same as your money from any other sources.

Experimental evidence suggests that the players are much more likely to use the money they consider “house money” for gambling. That being said, its important to understand that mental accounting doesn’t affect casinos only. Investors who buy a volatile inflamed assets often have similar feelings as the gamblers. When making a decision, think about Newton’s sad, but educational experience. It had nothing to do with intelligence, much more so with human emotions and greed. As you can see, Newton had a lot to teach us beside hiding our heads from falling apples.

 

 

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