In my previous post, we saw Adam Smith’s lottery analogy in Book I, Chapter 10 of The Wealth of Nations — or what I now like to call the “The Allegory of the Lottery” — where Smith describes the probability that one will have a successful career as a kind of lottery. Sometimes the odds of this lottery are fair. Sometimes they are not. And then I concluded my previous post with Smith’s prescient observation about “the natural confidence which every man has more or less, not only in his own abilities, but in his own good fortune.” (WN, I.x.23, p. 123)

As it happens, the father of economics has a lot more to say about lotteries and about “[t]he contempt of risk and the presumptuous hope of success” in the remainder of Book I, Chapter 10 of his magnum opus. (See especially paragraphs 26 to 33 of Book I, Chapter 10.) For now, however, I just want to point out how Smith’s allegorical lottery metaphor and his observation about the ubiquity of self-deception poses many intriguing, and perplexing, subsidiary questions.

Why, for example, is self-deception so pervasive in the first place? And why does this self-deception sometimes run in the opposite direction? That is, why do we, contra Smith, not only overestimate our chances of success but also overstate the risk of catastrophes? Or more simply put, how do we explain the lottery-insurance paradox: the fact that many of the same people who buy lottery tickets also pay for fire insurance? (See, for example, here, here, and here, as well as the infographic below.) I will return to these questions next week, starting on Monday, 31 August.