From getting rich slowly to getting rich quickly: How the "jackpot trap" devours your wealth

Author: thiccy , co-founder of Scimitar Capital

Compiled by: Felix, PANews

This article explores the shift in risk-taking from seeking stable returns to chasing big prizes, and its wider social implications. It involves some simple math, but it’s worth reading to the end.

Imagine someone gives you a coin toss. How many times would you toss it?

At first glance, this game looks like a money-printing machine. The expected return on each coin toss is 20% of net worth, so you should toss the coin an infinite number of times and eventually accumulate all the wealth in the world.

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

The reason almost all of the results come back to zero is because of the multiplicative nature of repeated coin tosses. Although the expected value of the game (i.e. the arithmetic mean) is a 20% gain per coin toss, the geometric mean is negative, which means that in the long run, coin tosses actually generate negative compounding interest.

What's going on? Here's an intuitive explanation:

The arithmetic mean measures the average wealth created by all possible outcomes. In a coin toss, the distribution of wealth is heavily skewed toward a very small number of jackpots. The geometric mean measures the wealth you would expect to be created with the median outcome.

The simulation above illustrates the difference. Almost all paths lead to zero. In this game, you need to toss 570 heads and 430 tails to break even. After 1,000 coin tosses, all of the expected value is concentrated in the jackpot outcome that only occurs 0.0001% of the time, that is, the rare case of a large number of heads in a row.

The difference between the arithmetic mean and the geometric mean creates the "jackpot paradox." Physicists call it the ergodic problem, and traders call it volatility drag. When expected value is hidden in the rare jackpot, you can't always "eat" it (achieve the expectation). Risk too much chasing the jackpot, and volatility will turn the positive expected value into a straight line approaching zero.

Cryptocurrency culture in the early 2000s is a vivid example of the “jackpot paradox.” SBF opened the discussion about wealth preferences in a tweet.

Logarithmic wealth preference: Each additional dollar is worth less than the previous dollar, and as the size of your funds grows, your risk appetite decreases.

Linear wealth preferences: Every dollar is worth the same, and risk appetite remains the same no matter how much money you make.

SBF proudly proclaims his linear wealth preference. He believes that going from $10 billion to $20 billion is just as significant as going from $0 to $10 billion, so risking huge, high-risk investments is logical from a civilizational perspective.

Su Zhu of Three Arrows Capital (3AC) also agrees with this linear wealth preference and goes a step further to propose an exponential wealth preference.

Exponential wealth preference: Each additional dollar is more valuable than the previous one, so as the size of funds increases, risk appetite also increases, and they are willing to pay a premium for huge returns.

Here’s how these three wealth preferences map to the coin tossing game above.

Given their understanding of the “jackpot paradox”, SBF and 3AC clearly chose to “flip the coin infinitely”. It was this mentality that led to their original wealth accumulation. In hindsight, it is not surprising that they both ended up losing $10 billion. Perhaps in a distant parallel universe they are billionaires, which also proves the risks they took.

These failures aren’t just cautionary tales about digital risk management; they reflect a deeper macro-cultural shift: a preference for linear or even exponential wealth growth.

Founders are expected to have a linear wealth mindset, take huge risks to maximize expected value, and become a cog in the VC machine that relies on power laws. Stories of founders like Elon Musk, Jeff Bezos, and Mark Zuckerberg who lost everything and ended up being the richest people on earth reinforce the myth of the entire venture capital field, while survivorship bias ignores the millions of founders who ended up with nothing. Only a very few can cross the ever-increasing power law threshold to salvation.

This appetite for big risk has permeated everyday culture. Wage growth has lagged far behind the compounding of capital, leading ordinary people to increasingly believe that their best chance for true upward mobility lies in lottery-style opportunities with negative expected value. Online gambling, zero-day options, popular stocks favored by retail investors, sports betting, and meme coins in cryptocurrencies all demonstrate people's preference for exponential wealth growth. Technology makes speculation easy, and social media spreads the legend of each new overnight rich, attracting a wider range of people to throw themselves into a doomed gamble, like a moth to a flame.

The current culture is turning into a culture that worships the "big prize", and the value of survival is becoming lower and lower.

And AI exacerbates this trend, further devaluing labor and reinforcing the winner-takes-all dynamic. The techno-optimist vision of a post-GAI world where humans will spend their time on art and leisure looks more like billions of people chasing negative capital and status jackpots on UBI subsidies. Perhaps the “up” sign should be redrawn to reflect the winding road to zero, the true contours of the “jackpot era.”

In its most extreme form, capitalism behaves like a collectivist hive. The mathematics of the “jackpot paradox” suggests that it is rational for civilization to treat humans as interchangeable labor, sacrificing millions of worker bees to maximize the linear expected value of the entire colony. This may be most efficient for overall growth, but it is a grossly unfair distribution of “purpose and meaning” (i.e., human pride and fulfillment, etc.).

Marc Andreessen’s techno-optimist manifesto warns: “People are not to be farmed; they are to be useful, productive, and proud.”

But rapid technological progress and a shift in incentives toward higher risk are pushing us toward exactly the outcome he warned about. In the “jackpot era,” the impetus for growth is the exploitation of one’s peers. Usefulness, productivity, and pride increasingly belong to a privileged few who outcompete the competition. We have raised the average at the expense of the median, leading to ever-widening gaps in mobility, status, and dignity, and a host of negative-sum cultural phenomena. The resulting externalities manifest themselves in social unrest, beginning with the election of demagogues and ending in violent revolution, which is very costly to the compound growth of civilization.

As someone who makes a living trading the crypto markets, I’ve seen firsthand the depravity and desperation this cultural shift has created. Like a jackpot, winning is built on the failures of a thousand other traders, which is a huge waste of human potential.

When industry insiders seek trading advice, the same pattern is almost always found. They all took too much risk and lost too much. There is usually a scarcity mentality at work, an anxious feeling of being "behind", and an urge to make a quick profit.

My answer to this is always the same: rather than risking profits, accumulate more advantages. Don't drive yourself to death trying to win the jackpot. Accumulating wealth is the key. Maximize median returns. Create your own luck. Avoid losses. Eventually you will succeed.

But most people will never be able to gain an advantage sustainably. “Just win more” is not a scalable advice. In the rat race of techno-feudalism, “meaning and purpose” always wins. This comes back to meaning itself, and 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 people, while Buddhism spread widely because it believed that everyone could be enlightened.

Modern equivalents of religion must do the same, offering dignity, purpose, and a different path forward for all people so that they don’t self-destruct in their pursuit of the grand prize.

Related reading: Don’t be led by KOLs: You must have your own opinions when investing