Outlook: Lottery investment
Wednesday 15 December 1999
Mr Greenspan has become an enthusiast for both the creative destruction loosed on the economy by new technologies and for the way the stock market has embraced them. He has, for some years, now been making speeches that flag the possibility of radical economic change.
In one of them last month, he compared investing in high-tech stocks to buying a lottery ticket. This is an intriguing idea that bears further examination, for it would suggest that the present mania for high-tech shares may not be as dangerous as it seems. In a lottery, people are willing to pay far more than the expected value of their winnings for the remote chance that they might hit the jackpot.
Similarly, Mr Greenspan suggested, investors are willing to put more than the amount on which they could expect a reasonable return into stocks that give them a small chance of making a fortune. This is not, of course, normal, rational investment, but much more akin to a gamble in which the punter knows he is much more likely to lose than to win. Like a lottery, in which the only consistent winner is the lottery company, not the punter, the aggregate returns on the technology bubble are bound to be disappointing. The parallel goes a bit further, perhaps. Because a large chunk of the proceeds go to "good causes", Britain's National Lottery is, in effect, a public levy used to finance projects for which people would be unwilling to pay tax in the usual way. It could be argued that the same is true of the technology boom.
Most of the money being invested in dot.com and telecoms companies are going to projects that are building the economy and infrastructure of tomorrow. The investment returns might turn out to be lousy, but, like the railway boom in the middle of the last century, the craze will leave behind something that transforms the economy and society, and generally enriches both.
So, on reflection, no wonder policymakers want to encourage investment in technology. It means the financial markets can, for once, live up to their place in economic theory as a device for applying capital to its most efficient use. Unfortunately, that's not the way most of us would view stock market investment. Stock market investors aren't looking, magnanimously, to give away their capital for the general good of humanity, but for personal enrichment. Most ordinary punters gamble only as much as they can afford to lose. The danger of the present stock market mania is that people are doing much more than that. If they are, then there will be a frightening degree of wealth destruction when the music eventually stops, as surely it must.
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