Why everyone is a gambler
I’m a pretty serious student of the financial markets these days. The other morning on CNBC, they were doing a little shtick where they were simulating a poker game with some big name hedge fund managers. All the while they were (sort of) playing, they were discussing the similarities between poker and trading. These hedge fund managers had also done well in some professional poker tournaments.
This little vignette solidified something I’d been thinking about for a while. That is, everyone is a gambler.
When you study the markets and people who make a business of trading in the markets, you slowly become aware that everything is simply a game of probabilities, risk and reward (for more of my thoughts on this, you can check out a post a wrote a while back specifically on this subject). These very same principles that allow an individual (or a professional) to make money in the markets also guide the games of chance at the casinos. They also guide pretty much every other decision we make every day of our lives.
When asked about the similarities of trading and playing poker, one of the hedge fund guys explained that in both cases, you are presented with a certain amount of information, but there is always a piece of information that you don’t have. You have to make a decision on how to handle that missing piece of information based on your understanding of the information you do have. You make a decision, place your bets, and hope for the best.
Honestly, can you say that this is different than anything else in life? There is no certainty about tomorrow. We are always dealing with an incomplete information set and making decisions the best we can based on what we know. When it gets right down to it, we always have to move forward, choose our path, and hope for the best.
This is why I say everyone is a gambler. So, why do we consider gambling to be “bad”? What makes tying up hundreds of thousands of retirement dollars in equity-based mutual funds (which can lose their value) any more virtuous than hitting the casinos? Or, what about the person who invests a large portion of their net worth into a new business venture — are they somehow more noble than the blackjack player? I have some thoughts, but I’d like to hear yours first in the comments. What do you think?
May 11th, 2008 at 4:03 pm
The difference between ‘betting’ on mutual funds and betting in casinos vis a vis the virtue of each is this:
1. Odds. The odds of losing everything in a passably decent mutual fund is extraordinarily low. The odds of losing everything in a casino is 100% on a long enough time line. The stewardship involved in investing in a fund vs. going to a casino is substantial.
2. The underlying elements you’re ‘betting’ on. With funds, you are gambling on a) an economic system with a proven track record (the ethics of that system are immaterial in this case) and b) a fund manager’s ability to select companies that will thrive in that economic system given current economic realities.
The probability of capitalism collapsing and the manager only picking companies that go bankrupt very quickly is very low on any kind of reasonable investment timeline.
So with funds, you’re hoping your outcomes are CONSISTENT with the odds.
With casino games, you’re betting that you get lucky. Playing blackjack out of a 1 or 2 deck shoe while using basic strategy and counting cards is about the only way you can walk into a casino with the odds even slightly in your favor.
In most cases, the odds are dramatically against you. So with casinos, you’re hoping your outcomes are INCONSISTENT with the odds.
Again, bad stewardship in the case of casinos.
Investing in funds ends up looking like good stewardship. Going to a casino looks like horrible stewardship.
If you’re going to place bets with casinos, you’re most probably better off betting on their stocks than on their tables.
I’m sure there are other considerations, but those are a couple of pretty straightforward ones.
May 11th, 2008 at 4:09 pm
Hey Jay, thanks for the input. Some good considerations in there. I have some thoughts but I want to see if anyone else will throw in some comments before I say too much.
I will say I like this line:
“If you’re going to place bets with casinos, you’re most probably better off betting on their stocks than on their tables.”
It brings up an interesting thought — that is, casinos are only a game to those people walking through the door. To the casino owners (i.e. shareholders) they are a business, and a highly calculated one at that.
I’ll feedback more after a bit. Anyone else have thoughts to share?
May 12th, 2008 at 8:12 am
After watching a very good friend of mine become homeless due to his gambling addiction, I can say that there is a huge difference between investing in mutual fund with a 10-year or more track record and throwing money away at a casino. Gambling/lotteries are a tax on the poor - because that’s who mainly plays them.
Take any 10-year period in the stock market’s history, and you see that it has earned money every time. Any 5-year period, and it’s earned money 97% of the time. That’s not that much of a gamble, if you’re a long-term investor.
May 12th, 2008 at 5:03 pm
Thanks for all of the feedback. Perhaps the match up of mutual fund versus casino is too extreme to really make my point. There are naturally extremes to every spectrum. Where is the point at which virtuous investing becomes corrupt gambling. What makes that distinction.
Mutual funds do have decent probability of success and that probability is increased the longer you stay invested in the fund. But the trade off is that they have a lower reward/risk ratio. You are risking a lot to make a little.
Move into some options trading products and you can create positions that provide any possible combination of reward, risk and probability. You can risk a little to make a lot, but of course your probability goes down. Or you can do higher-probability trades that have lower reward / risk. Is it gambling to get involved in these products?
Move from there into the high-flying managers at Bear Sterns who leveraged themselves 90/10 on debt and collapsed when their underlying instrument (housing) lost value. Was that gambling, or was it money management? What about the people who invested in the products those managers were managing? Were they gamblers, or were they investors that just got unlucky?
As we head down the spectrum toward casino gambling or lottery playing, what makes the difference and at what point does it move from respectable to deplorable? It all has risk. It all has reward. And it all has probability. Where is the good and where is the bad?
I’m not just trying to be difficult here, I really am trying to work through this. Thanks for your feedback. Any more thoughts?