It is well known that people often make irrational financial decisions even in fairly simple situations where they have all the information they need to make a good decision. I have an idea about why we are this way that is so simple that it is very unlikely to be original, but I couldn't find this idea in other writings in a quick search.
One simple model of the value (or utility) of money is that each doubling of your savings has the same incremental value. So, if you start with $100,000, dropping to $50,000 is as detrimental as doubling to $200,000 is beneficial. For small gains and losses, the sizes of steps of equal utility differ by less. For example, a loss of only $1000 is as detrimental as gaining $1010 is beneficial.
However, throughout most of human evolution, great wealth for a single individual did not exist. Before the advent of storing food, a large kill would only last until the meat rotted or was taken by other hungry people or animals. We are simply not suited to making decisions about large amounts of wealth.
In modern times, if you are offered a 50/50 chance at winning $20 or losing $10, and you’re satisfied that the game is fair, it is rational to take the chance. However, an ancient human or pre-human might make a different calculation because he is always just a few missed meals from death.
Suppose that a hungry ancient human could either stay with a small kill to eat a day’s worth of food or take off after larger prey for a 50/50 chance of either getting triple his need for the day if he succeeds or going hungry the rest of the day if he fails. It seems perfectly rational for him to take the safe choice, fill his belly now, and hunt again the next day.
This line of thinking may also explain lottery tickets. Early humans used to routinely walk away from wealth. Once the belly is full, extra meat or berries have little immediate value. It makes sense to give away small amounts of food you don’t need right now in return for a shiny rock or even just the prospect that the receiver might give a favour in return some time in the future.
So the theory is that we are not well adapted to making decisions about years worth of wealth. We tend to make decisions about small amounts of money as though we have very little, even if we actually have enough money to survive for months or years.