I was on the street corner near Checkpoint Charlie this weekend and I noticed that some fellows were playing some sort of shell game on the ground. For those not aware a shell game is played by placing a small ball underneath one of three plastic cups then moving the cups around so as to confuse the balls location. The player then chooses one of the cups, if he chooses the cup with the ball under it he wins, usually a wager is placed on this. This particular version of the shell game used a tiny white ball, three matchstick boxes, and took 50 euro wagers.
It caught my eye immediately because the game looked fair. The man “running” the game paid out money when he lost, and occasionally bystanders won. What was really striking however, was that from a distance I noticed that he’d occasionally slip and accidentally reveal the ball under one of the matchstick boxes. If the folks playing the game chose the box that I had seen the ball get revealed under, they would win. This further reinforced my belief that the game was fair. After all, the guy running the game didn’t palm the ball right after I had accidentally seen it.
This looked like a game that could be won. Simply wait long enough for the game runner to slip up, bet 50 euros and then win by picking the matchstick box that he’d revealed the ball under. I waited long enough to see a tourist do precisely that. He stepped into the game, made a bet on an accidentally revealed box and the whole game came to a halt. The game runner made sure he got the man’s 50 euros before the box could be turned over, there was a short discussion between the tourist and game runner, but when the tourist flipped the box there was no ball. The game runner flipped the other box and there the ball was…
It’s called a shell game for a reason
Shell games are practically synonymous with scams. The operators of these games know it, and they know that you know it too. So how in particular did this scam work? I saw the operator take about 200 Euros from tourists over the course of 10-20 minutes, and it wasn’t until a few hours later turning the thing over in my mind that I had figured out exactly what was going on.
Step One: Build their trust
This was accomplished through the use of shills, people who stood around, playing the game, winning and losing several times before any actual players had even considered it. In this case probably 3 or 4 people were working with the operator of the game to create the illusion that people were happening upon the game playing a few times, winning some, losing some, and walking away, as though this is just something one did in Berlin. A little gambling on the streetcorner, why not? After the fact, I realized that none of them were appropriately excited when they won 50 Euros, at least not excited in the way I would be excited. They really didn’t seem to care whether or not they won, simply going through the motions of handing money back and forth to the operator of the game. All of the playing at this point happened very very fast.
Step Two: Appeal to their greed
The other important part here is that the game was made to look winnable, not simply because other people won it, but because you could understand why they won or lost. Almost always the operator would slip up and reveal the location of the ball just before a player had to make his choice, so you would almost always know what the “right” answer was. When one of the shills picked the one you knew was the winner they would win, when they picked one you knew was a loser they would lose. This is a game you could understand. This was a game that you could beat, and they’re playing for 50 Euros a time. Not enough that you can’t afford to risk it, but not so little that it wouldn’t be exciting to win.
So you watch the game play out maybe a dozen times, then you make your move.
Step Three: Gaslight the player
You offer to bet and the operator stamps on the matchbox you choose, so that you can’t reveal it until he knows that you’re going to pay he says. You have to give him the 50 euros first and then you can flip over the box. This negotiation takes a little while, and it accomplishes three things. First, the operator gets your money and knows that you won’t skip out on him. It’s harder for him to get you to pay after you know that you’ve lost after all. Second, it takes your mind off where the ball is and onto convincing this guy to let you bet, after all you have a sure thing. Third, it prevents you from doing any potentially embarrassing things like flipping all of the cups and revealing that there was no ball in any of them.
Taking your mind off the ball is important because, you have to remember, you’ve just seen him “accidentally” reveal the ball under this box you picked. Without this 30 seconds of negotiation you’d know you’ve gotten cheated, with the extra time, did you really see what you thought you did? Who knows? Even so, what are you going to say? “You slipped up and showed me the ball under this cup, I was trying to cheat you good sir!” After all the ball did turn out to be under the other cup, maybe you just made a mistake. You let him keep your money and walk away.
Why am I telling you this
Reminiscing on the whole thing I’m strongly reminded of the experience of new people, and frankly some old hands, with the stock market. The steps feel similar. First, you see other people getting rich. Second, you selectively remember the times you were right about stocks, especially stocks you thought were good which then enjoyed a significant upward run. Third, when you actually get involved with your money it doesn’t turn out at all like you expect, but you keep your mouth shut because no one likes to brag about the mistakes they made in the market, so then the next generation gets ready to invest and…
In total I think that means there are a couple things to keep in mind about the market:
- Making money in the market isn’t easy. Beating the market by a few percent over 20 years is really great, really rare, and sounds really boring. That’s the best you can hope for. The average dollar in the market does average. The average person in the market does much, much worse. You can do as good as the average dollar just by indexing into a total market fund.
- Selective memory is your enemy. Keep an actual record of your investment ideas before you start investing, in the mean time your money goes into index funds. Though its important to remember that there are day trading strategies which work with play money but not with actual money. Your investments have an effect on the market only when they’re real, and sometimes that effect can dry up the source you thought you were making money from.
- Admit your mistakes. It’s a lot easier to learn from your mistakes if you’re willing to talk to other people about them. It’s also important to keep in mind that investing is a game of probabilities, not everything will work out, and not everything that doesn’t work out is necessarily a bad idea. It’s always important to try to determine if you lost money because you were on the other end of a shell game, or a fair casino game. Losing the dollar in either case sucks, but whether or not it was possible for you to win is important!