How words bring down economies

One of my pet peeves is when people misuse words. I put a lot of effort into making my language as correct and precise as possible because I know I get distracted when I run across errors in others’ work. There’s a certain critical threshold of errors beyond which I am so irritated that I find myself unable to concentrate on or consider the central thrust of the writing (for example, blog posts written in IM speak). I don’t want to give readers of my work any excuse to dislike it beyond a real disagreement with my ideas.

But still, misuses of words are still pretty minor in the grand scheme of things. I would never dare write a blog post about how I get annoyed when people write “your” when they mean “you’re”, so what misuse of a word could possibly be prompting this blog post? It has to have greater ramifications than simply causing annoyance. And thus, it does. Misuse of the this word is partly responsible for the terrible financial situation the United States is currently in. Of course, I’m talking about the word “invest”. Follow along as I explain the power of words, and how co-opting of them can cause huge problems.

The United States is awash in bad debt. Aggregate consumer debt has grown larger than our Gross National Product. The housing bubble and economic growth of the past few years have all been predicated on an illusion of economic growth that simply wasn’t there. The personal savings rate is negative. You can only go so far with an economy that is built upon people spending money that they don’t have, and we’ve now reached that limit. All you have to do is look at the advertising right now encouraging people to borrow against their tax rebate checks to buy big screen televisions to know that there’s a problem.

And some of this can be traced back to the intentionally misleading ways in which the word “invest” is used, both by the advertising campaigns designed to make you feel better about frivolously parting with your hard-earned money and by people themselves rationalizing unnecessary purchases. But first, a definition. An investment is a purchase that can be reasonably expected to increase in value in real terms over time. For instance, the purchase of stocks, bonds, mutual funds, etc., is an investment. Even the purchase of fine wine can be an investment if you know what you’re doing (and over the past decade, the growth in value of cellars full of fine vintages has significantly outpaced the S&P 500). But keeping cash in a checking account (or burying it in coffee jars in your backyard, pretty much the equivalent) is not an investment, because its value will depreciate in real terms over time as its purchasing power is eaten away by inflation.

It’s very simple. Investment is the act of purchasing an appreciating asset. The act of purchasing a depreciating asset is, by definition, not investment. Yet so many people use the word “invest” when what they’re really describing is the purchase of a depreciating asset, for instance: “I’m going to invest in a new car” or “I’m going to invest in a new set of speakers”. People only started using this deceptive terminology because companies ran slick advertising schemes that perverted the meaning of the word. They rely on the word’s positive connotations persisting even when it’s used incongruously. It joins a long line of propagandist double-talk like “fighting for peace”, “Operation Iraqi Freedom”, and “freedom is slavery” (alas, there’s no better place for an Orwell reference).

I even heard a talking head on the local news refer to the purchase of a $5 lottery ticket as a “good investment” for the people who won the recent $270 million PowerBall jackpot. Gambling is not an investment! The expected payout of a lottery ticket is less than the cost of the ticket, so it is not an investment. Don’t confuse luck with financial prudence. For everyone who wins a PowerBall jackpot, there are millions of people whose “investment” in the lottery tickets didn’t pay off, and the total amount of money they threw away far exceeded the pay-out to the few lucky winners.

So the next time you hear someone refer to the purchase of a depreciating asset as an “investment”, please slap them with some common and fiscal sense. That poor innocent word has been perverted beyond all recognition into a synonym for “purchase” even though it absolutely does not mean the same thing. The best way out of our current financial mess is to promote real saving amongst the American populace to dig ourselves out of this debt hole. And to accomplish that, we need to wage a war of words and reclaim the true meaning of the word “invest”.

8 Responses to “How words bring down economies”

  1. drinian Says:

    If you want to reclaim the true meaning, you’re going to have to use the word only when investing power with your subordinates, or dressing yourself (cf. the Compact Oxford English Dictionary).

    Given those historical meanings, I tend to think of investment more broadly, as purchasing things that will have value to me. My car may not appreciate in value over time, but having a reliable car is a valuable thing to me.

  2. Cyde Weys Says:

    I’m not sure if you got the wrong link or what, but when I put invest into their dictionary search these are the top three definitions, which are entirely consistent with the modern usage of the word:

    1 put money into financial schemes, shares, or property with the expectation of achieving a profit. 2 devote (time or energy) to an undertaking with the expectation of a worthwhile result. 3 (invest in) informal buy (something) whose usefulness will repay the cost.

    And if it really does have some ancient meaning that’s different than the modern usage, then I’m naturally referring to the modern usage in the blog post above.

  3. Larry Pieniazek Says:

    A lottery ticket can be considered an investment, when the expected value of the ticket exceeds the cost. You have to calculate the odds of winning, do a NPV on the payment stream, take into account taxes, etc, but my analysis has shown me there are times when Powerball or Mega Millions tickets are investments. Not often, but it does happen when the jackpots get way up there.

    Even though I confine my buying to those times, (the rest of the time it’s a “stupidity tax”) I still do it only for the thrill… even if it IS technically an investment you probably still shouldn’t look at it that way.

  4. Cyde Weys Says:

    Are you also factoring in the odds that someone else will win the jackpot, thus causing you to have to split your winnings? When the jackpots get really big, lots more people start playing, and the chance of multiple people winning at once shoots up by a lot. It must be once in a blue moon that the expected payout of a jackpot really does exceed the price of the ticket multiplied by the chance of winning. And even then, it really shouldn’t be considered an investment, more of a favorable gamble. Not that 99.999% of lottery ticket buyers know how to do all of the proper analysis anyway.

  5. Kelly Martin Says:

    There was actually one time where the payout on some lottery (in Missouri, I think) exceeded the cost of buying all the tickets, due to a multiplier rule of some sort.

    The odds of splitting a jackpot are astronomical even when compared to the odds of winning the jackpot, and as a result has a miniscule effect on EV.

  6. Cyde Weys Says:

    The odds of splitting a jackpot are not minuscule. It happens all the time when the jackpot gets really big because so many people are buying tickets. I vaguely track these lottery winnings and many of the really big ones are won by two people, sometimes even three or more people. If these occurrences halve the EV on a large jackpot, that’s emphatically not minuscule. That means that, to achieve the same expected payoff, the ticket price would have to be half as much! For instance, just check out the Wikipedia article: the break-even point is at $242M if no one else is playing!

  7. Jeff V Says:

    Even if you found a situation where buying a lottery ticket would have and expected return that is positive (taking the probability of losing * cost to play + prob. of winning * cash flows from a win) I highly doubt that it would still be considered a good investment when you factor in the required return on an “investment” as risky as a lottery ticket.

    For example, a stock that is considered no more or less risky than the market as a whole would have a risk premium in the neighborhood of 6% (this changes constantly)and a beta of one.

    You derive that stock’s value using the CAPM by adding the return on a 10 yr treasury note–which is considered risk free– to the market risk premium of 6% * beta which in this case is 1.

    The beta (or risk coefficient) of a lottery ticket would be astronomical. I couldn’t imagine that you’d be compensated for the level of risk in your “investment”.

    Also, is it really true that fine wine investments beat the S & P? Do you have a link or something that I could check out? That is interesting.

  8. Cyde Weys Says:

    Jeff: Here’s one article on the subject, though without too much effort you can find much more. That’s the article I had in mind when I was writing this post though.

    And yeah, buying lottery tickets is the riskiest “investment” around. Even if you put in hundreds of thousands of dollars, the chance of losing the vast majority of it is going to be many nines long. I guess you could say it’s the ultimate speculation, though with worse returns. $242 million is the break-even point if no one else is playing, so the point at which you stand to double your money is when the lotto is at least over $500 million (which hasn’t happened yet). Needless to say, there are many more investment opportunities that give you a much better shot at a 2:1 expected return.