Home > Facts and Figures, Human Limits > Lottery tickets and the AIG bailout

Lottery tickets and the AIG bailout

Much ado has been made recently about the AIG bailout, and specifically about whether it has made or lost money for the U.S. Treasury. The latest numbers flying about are from Neil Barofsky, former special inspector general of TARP, and the Treasury Department itself. The New York Times, reporting on the war of words, comes down squarely on the side of Treasury.

The pat explanation is that the bailout of AIG “worked.” It is a cute story, even if it seems to be keyed to the election.

On the other hand, my contention is that is does not matter whose numbers you use, or how you massage the accounting. In point of fact, there is really no way of knowing how much the bailout really cost us; you can add and subtract stock prices and buy-in and sale, but how do you quantify moral hazard for example? Any accounting is bound to be inadequate

But more importantly, the math does not really tell us anything useful. It gives us hindsight bias, and nothing more. Compare the AIG bailout to buying a lottery ticket. (Perhaps an apt comparison, given the level of decisionmaking involved.)

It is a known and accepted fact that buying a lottery ticket is a mistake. The ex ante math tells us that we waste our dollar on the lottery ticket, because the odds are far too long to expect a payoff.

But somebody has to win. If you buy a winning lottery ticket, is it fair to declare that you made the correct decision in buying the ticket after the fact? I contend that it is not. Objectively, buying the ticket in the first place was a poor decision, and since there is no way of knowing ex ante whether you hold a winner, the decision must be deemed poor regardless of what you discover ex post.

It is the same with the AIG bailout. Ex ante, there was really no way of knowing whether Treasury would turn a profit, but we were nevertheless playing terrible odds on a tilted roulette wheel. With all of the negative consequences of this particular course of action, it is unwarranted to highlight a gain in stock price that was, ex ante, completely speculative.

Now if you’ll excuse me, I am going to go complain about how the general manager of my favorite baseball team is an idiot because he did not trade his star player before he got injured.


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