...the point was, he realized he didn't HAVE to fight to have dignity.
This movie was actually very much in keeping with the true martial arts philosophy. At this point in his training, Joe knew he had a pretty good chance of defeating Mark (Patrick Warburton's character). Knowing that, there was no need to actually do so.
Joe also found out that all those cheering him on were not his friends, just hangers-on.
Jim Belushi's character pointed this out to him when he recounted his days as a movie star. People were lined up to kiss his ass, but when they tired of him, they formed a new line behind someone else (no pun intended).
I think this fact dawned on Joe when he saw people in the crowd placing bets.
True friends would be concerned for his well-being, not trying to make a few bucks off him, or attempting to satisfy some base blood-lust.
Make sense now?
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