Is gambling a form of investing? This article is going to investigate.
You may have heard people in the past talking about how gambling is similar to investing in the stock markets. This is true to some extent as both risk money in order to make more than they started with.
There is more to it though. Both investing and gambling require knowledge of what they’re either investing or playing, otherwise there is no way that they will profit.
It’s also important for both an investor and a gambler to pay attention to how much capital they are willing to risk. If it’s not managed properly, it becomes more likely they lose bigger than they should.
It can be seen already that investing and gambling are quite similar. But how and why are they considered different?
To get to the bottom of this, it’s important to first define the terms ‘investing’ and gambling.
What Is Investing?
Investing is committing funds to a certain asset with the expectation that it will grow in value to make a profit. The important word here is ‘expectation’. Investors make their money expecting, rather than hoping, that their assets will increase in value.
Investing requires an understanding of risk and return: investing in low-risk assets generally means that returns are expected to be low, while investing in assets at higher risk generally means that returns are expected to be high.
It always comes down to how much an investor is willing to risk in their asset. The standard amount is usually around 2% of their total capital per trade.
To gain an advantage and make money, traders study the markets and current affairs to get a better understanding of their movements. For example, they will look at their charts and look for patterns that have happened in the past and use their results to predict how the current asset price will move.
This process is known as technical analysis.
It’s also important to note that an investor’s returns can sometimes be affected by the commission they pay to a broker that buys or sells their assets on their behalf.
Finally, investors own a part of the company they are investing in.
What Is Gambling?
Gambling is the act of staking money on a contingency rather than an asset. It involves risking money on an event with the hope that it makes money.
Straight away, this definition shows a difference between gambling and investing. Traditionally, gambling has no certain outcome and relies a lot on chance.
But there are ways to reduce the risk, such as creating a data-driven strategy. Particularly in used in sports betting, this involves analyzing the results of previous games, creating a theory and then backtesting it to make a profit.
Like investors, gamblers should also keep an eye on how much capital they are willing to use per bet. For example, in card games like poker, pot odds are a great way to determine risk versus reward during a hand. When the odds are in the player’s favor, it’s more likely that they will call a bet.
For casino games, gamblers play against the casino itself, known as ‘the house’. In sports betting, while they are in theory betting against the house, it’s the other players that determine the odds of the event they are betting on. The more money that goes on one side of the betting line, the shorter the odds become.
Gamblers are commonly faced with situations where they do not expect to win. For example, in blackjack, when the dealer is dealt a ten and the player is dealt a six, the chances of winning are slim.
So, here are some key takeaways from these two definitions:
- Both investing and gambling risk money in an attempt to make a profit.
- Both investing and gambling use tactics to minimize risk.
- Both investing and gambling can use resources to improve accuracy.
- Investors have more resources available to mitigate losses.
- Gamblers play knowing that the odds are not in their favor.
Mitigating Losses
This is an interesting topic.
Investors have multiple ways to prevent them from losing too much of their capital. One such method is by setting stop losses on asset investment. If the price drops below 5% of the purchase price, there is an opportunity to exit the trade and sell that asset to someone else, retaining 95% of the risk capital.
Now, in terms of gambling, some people will argue that there is no way to limit losses. An example they will use is taking part in an office sweepstake, where everyone pays a fee in exchange for drawing a random competitor. If the price is $10 and the team loses, the gambler is said to have lost everything.
However, this logic is often misguided.
In reality, professional gamblers employ a strategy called bankroll management. It involves only betting a certain amount of gambling capital per bet and ensures that even if bets lose, they don’t go broke.
Most bankroll management strategies can ensure that 100-200 bets can be made at their particular level. For example, if someone regularly stakes $10 per bet, they will have at least $1,000 in gambling capital.
If the gambler goes on a downswing and loses the majority of their bets over a certain period of time, then they decrease the amount they bet per event to ensure they can still make between 100-200 bets at that level. So, using the previous example, if someone betting $10 per event goes on a downswing and they lose $500, they would reduce their betting amount to $5 per bet.
So all in all, this is actually a similarity between the two ways to make money: both gambling and investing have ways to mitigate losses.
Edges And Value
It was established that both investing and gambling use methods to mitigate risk and maximize the chances of making a profit. However, in the case of gambling, the house always has an edge over the player.
On the other hand, investments tend to appreciate in value over time.
Now, this does not mean that gambling can not make a lot of money, nor does it mean that investing in assets always guarantees a positive return.
While the odds always favor the house, it’s important to seek value from bets to maximize returns.
The term value refers to getting the best odds and making the best play based on the information available. In sports betting, this could be in the form of a heavily underpriced underdog, while in poker, it refers to making a bet with the assumption you have the best hand.
Time
Time is another difference between gambling and investing. Gambling is constrained by time. While online casinos can keep you gambling all day and night, no matter if it’s a hand of poker or a horse race, it comes to and at some point or another.
When the event finishes, the opportunity to profit further also comes to an end. Either the bets have won or they have lost.
On the other hand, investing in assets can be rewarded by time. When an investor enters a trade, it will go on for as long as that asset is real. For example, if the asset was stock in a company, the trade could, in theory, continue until the company is sold or goes bust.
One way is when investors are paid by companies that they have invested in with dividends. No matter what happens to the value of these shares, the company pays money to the investor in return for the investment.
While it’s great to make money from the appreciating price of the asset, it’s even better to be rewarded for simply investing in the first place.
Gathering Information
Both gamblers and investors can improve the success of their trades by looking at past results and comparing them with current performances. Information is the most valuable tool for both investors and gamblers but there is a difference in terms of how much is available.
Investors can gather information from a variety of sources, such as company reports, financial institutions and, for stocks and shares in particular, even through researching the people running the companies before having to commit a dime to the investment.
The same goes for sports betting. Professionals can find data that affect the results, such as the weather from historical websites and sports news companies. Similar to investors, they can put all this information into a strategy before betting anything.
However, for some casino games, even if you do all the preparation in the world, there is no information about what happened at the table earlier in the day that can help to make a decision during play.
Addiction
Now, to most people reading, their minds went straight to gambling addiction. Why? Because it’s assumed that there is no such thing as an investing addiction.
This isn’t strictly true.
Of course, compulsive gambling is a problem that must be addressed. Organizations like Gamblers Anonymous help people overcome their addictions. But there is no such thing as Investing Anonymous, while there are never any news reports detailing the effects of compulsive investing.
Addiction to investing does exist. It’s just seen as a financial problem, rather than an addiction.
People who invest online are prone to checking their investment portfolios on a very regular basis. They will also make multiple trades more often than they probably think. This can get very expensive: not only are they paying a lot in commission to brokers, but they are also investing a lot of energy.
There are also investors that risk capital more aggressively than they should. If the wording was changed to ‘gamblers betting more money than they should’, it clearly points to a problem.
Risk-Adverse Vs Risk-Seeking
Gamblers and investors rely on taking risks to make money. Granted, some investments like government bonds held to maturity don’t have much, if any risk attached, but then again, they are prone to the risk of inflation.
The difference lies in the individual’s willingness to find and accept risk. Investors don’t tend to take risks unless there is a large reward, whereas gamblers are forced to take risks with every bet.
There is a notion though that gamblers often take risks that they shouldn’t, while investors do not. Like many of the topics discussed, this is not necessarily true.
Here’s an example.
An opportunity arises where an individual is presented with the following opportunity: they can either take $100,000 right now or risk $1 million on a 50/50 chance.
The obvious, most common response is that taking the 50/50 means the individual is more of a gambler. After all, they are passing up the opportunity of $100,000 without having to risk a thing.
But looking at it objectively, the individual needs has odds of 10/1 to improve. To profitable make this investment, they need to be right 10% of the time. In a 50/50, they are right 50%, so they have 5x more equity needed.
Is this a gamble or a good investment opportunity? One could argue either way.
Of course, gamblers that think this way are different from those that are heading to Las Vegas for the weekend looking for a good time. Those that look to justify their bets before making them act more like an investor.
Conclusion
Gambling and investing are more alike than most people think. They both require careful management of capital, using resources to make their trades and plays more accurate, while also having the ability to give an individual financial freedom.
But of course, they are different. Investors are not limited by time and gamblers do not always have the luxury of using past information to help them make informed decisions.
One thing is certain though: whether it’s via investing or gambling, it’s important to understand the purpose of each trade and bet. Otherwise, it really does become a game of chance.
