41 ms·

Are You Trading or Gambling?

mgh2 6y ago
What about investing? The current narrative is more like “robinhood stealing” by whatever means
ilaksh 6y ago
It's an artificial distinction. If you are wealthy, you have access to opportunities with good odds, call it trading and tell everyone about it so they know you are a sophisticated and wise investor. If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible.
- rustypython 6y ago
  I don't think the odds is really part of the distinction. If you find a way to "gamble" with positive expectation, by profiting from sports betting markets for example, you are still labelled irresponsible and reckless compared to real "investors" who buy stocks, even when those bets are clearly unwise.
- superbcarrot 6y ago
  > If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible. And rightly so. For two main reasons - demonstrably negative expected value of the bets (like in casino floor games or the lottery) - relatively high proportion of total net worth wagered I'm very comfortable with labeling this as irresponsible (regardless of levels of wealth). It's not just a case of "everyone does it but only poor people are shamed for it", there's a clear distinction between the two cases.
  - Bakary 6y ago
    The more useful interpretation of the argument is that it's another form of justifying the social order through cultural perception of the inherent worth of people in each class i.e. everything a wealthy person does thanks to wealth is traditionally promoted as a sign of their inherent worth, and everything a poor person does out of the conditions of poverty is interpreted as a sign of their fundamental roughness. This is especially true in a Protestant context of wealth being an indication of divine favor.
- IgorPartola 6y ago
  I tend to agree. Trading stocks is essentially gambling but almost worse. The odds are rigged but you don’t know by whom abs how much. It’s a game of skill, except not entirely. The house always wins except there are multiple houses and you can lose to all of them. I think investing is a different beast: that is going long on a company, industry, or the market in general. You reasonably know that the market will over time go up. With specific industries or stocks you take a bit more risk but you are still buying ownership of a thing and things tend to become more expensive over time unless a better thing comes along. But short term gains chasing, especially as a retail investor is just gambling.
  - midasuni 6y ago
    Stick a 1% tax on all share buys and use to reduce income tax for working people, or just issue it as a cheque at the end of the year that people can invest. That doesn’t harm investing
    - catmanjan 6y ago
      Uh, that's a great idea, has this ever been proposed formally?
      - deleted 6y ago
        [deleted]
      - spiralx 6y ago
        Financial transaction taxes have been introduced in any number of countries, the majority of which have ended up repealing them: the tax raised on transactions is outweighed by the loss of capital gains caused by a reduced number of transactions occurring. And in today's global financial system you could end up like Sweden, where introducing an FTT saw 80% of trading move to London within a year...
    - nemo44x 6y ago
      The Net Investment Tax is a better way and already exists. It taxes actual gains over a threshold so “the little guy” is unlikely to pay.
- naveen99 6y ago
  When you are poor, your discretionary investments are a small fraction of your future income. So you can afford to blow out your brokerage account a few times. In a way, college, marriage, and kids are leveraged bets on your future income so they are more risky than gambling past income. When you are wealthy you have to be more disciplined and pace yourself. The only thing you thing that you can’t slow down the pace of is time.
eterps 6y ago
I think this is an interesting concept for gambling: https://pooltogether.com https://pooltogether.com
- scribu 6y ago
  Ah, a lottery on a blockchain. Why not! Except, unlike a national lottery, you can't trust the issuer and the value of your prize fluctuates even after you win.
  - eterps 6y ago
    I was referring to the concept, not whether it is centralized or decentralized. Most blockchain applications don't need one to function.
  - dannyw 6y ago
    1. Blockchains actually allow for "provably-fair" (cryptographically determined) lotteries. A lot more fair and trasparent than national ones. 2. This specific lottery uses stablecoins, with a value tied to the US dollar. So both of your points are invalid here.
TomGullen 6y ago
Working out EV is easy for casino table games, relatively easy for poker and extremely difficult for stocks trading.
- oh_sigh 6y ago
  Yes...bet sizing is something I worry about a lot, but it isn't clear to me how to apply the kelly criterion to a game where the risk/reward is mostly unknown and only based on a hunch.
  - scribu 6y ago
    One better-than-nothing way is to look at historical data: Looking at the closing price for each trading day, count how many times the stock ended higher and how many times it ended lower than the previous day. Then you have your odds.
  - hgjnhikn 6y ago
    You could make a table where row is guessed probability(input to Kelly criterion) and column it's actual probability and cells contain expected value and expected log value. And pick something which looks reasonable.
- tchalla 6y ago
  The reason is pretty simple - probability of events are an important input to calculation of expected values. If the probabilities are off, expected value calculations will differ. Also, Expected Value works under the “law of large numbers” assumptions. That in turn brings into picture the “sequence of return” risk. Two drastically different sequences can lead to the same Expected Value but can have serious short term implications. “The market can remain irrational longer than you can remain solvent.”
  - superbcarrot 6y ago
    > Also, Expected Value works under the “law of large numbers” assumptions. Technically, EV has nothing to do with sample size. But I get your point that in sufficiently small sample sizes and/or sufficiently large bet sizes you might need to think about utility rather than expectation.
hendler 6y ago
Eric Ries's https://ltse.com/ https://ltse.com/ is one alternative.
konjin 6y ago
Gambling and I know it.
21stio 6y ago
Hey Chris, thanks for sharing the article. I think I spotted a minor logical error in it tho. > This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1. 50% * (+2) + 50% * (-1) = +$1. Isn’t it an average gain of $ 50ct per coin flip? That way the calculation would be correct aswell.
- TulliusCicero 6y ago
  Yeah, I'm also pretty confident it's an average of +50 cents per flip. E.g. if you get 50 heads and 50 tails in 100 flips, that's +$50, which maps to 50 cents per flip.
- christopherjgan 6y ago
  Good pick up!
elygre 6y ago
Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else. The idea was looking at the how well the company would perform. Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. The idea was looking at how well the stock would perform. Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Day trading would be the example here, profiting mainly on marketplace dynamics, no matter the stock. The idea was looking at how to be a better player than the others. Then he talked about how the game perspective was the only model that really matched the marketplace, and how the stock market had evolved from being place where people would invest in companies, to a place where they would play a game with other peopl.
- WalterBright 6y ago
  > the game perspective was the only model that really matched the marketplace I don't buy that. If a company consistently grows and makes money, its stock is going up. The stock value is always going to revert to what the company is doing.
- IgorPartola 6y ago
  That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.
  - TeMPOraL 6y ago
choonway 6y ago
trading is gambling. the only difference is the risk and insider info.
- curiousgal 6y ago
  It's always funny to read such generalizations. You will (almost) never find a trading desk at a bank that takes a directional position on an asset, i.e. gamble. The entire foundation of quantitative finance rests on hedging and replication. If I sell an option contract for $x then I must use that $x to build a portfolio that would compensate my potential loss on the option that I sold you.
uyt 6y ago
> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average. Expected value doesn't tell you much about the outcome of successive bets. Someone else can probably explain this better since it comes up on HN a lot (something about ergodicity and the difference between ensemble average and time average). Quick example is if play a game of double or nothing on coin flips. This is a "fair game" because you pay x and get back 2x * 0.5 + 0 * 0.5 = x. But if you play more than one game you will very quickly get a "nothing" and can't continue.
- chillydawg 6y ago
  Kelly staking criteria tells you how much to bet in such situations. in this case: nothing since it's a pointless bet, economically speaking. you may derive utility from the lols, though, in which case probably don't bet the whole bank in one go!
  - dmurray 6y ago
    The Kelly criterion doesn't apply in this scenario. Imagine the same game, but it's triple or nothing (so, the odds are massively in your favour) and you can walk away at any time after resolving a bet, after which you go back to investing in Treasuries or low-cost index funds. How much should you wager? Kelly says 25% (edge of 50% / odds of 2). But this is correct only under the assumption that you will have infinitely many opportunities to play the same game at the same odds for whatever stake you choose. If you only have one chance, you should bet more. It also assumes a linear utility value of money: assuming this is actually convex, you should bet less.
dalbasal 6y ago
This is totally meta but... this style of writing or rhetoric is prone to "semantic not concept" problems. Gambling, Trading or Investing don't have strict enough meanings to withstand a "socrates is a man" analysis... The author here is trying to make a point about EV. IE, a player is gambling, but the house is investing because positive or negative EV. I disagree. IMO, negative or positive EV is not what separates house from punter. What separates house from punter is volatility. The house's risk is spread over many bets, and so EV (positive or negative) is a good predictor of performance. Punters don't spread their risk. Roulette with positive EV is still gambling... it's just a "good bet." Obviously, the house tries to only offer bad bets. Skill games (both the author and gaming authorities agree) can still be gambling... though skill games can give players/gamblers a positive EV. I also, kind of, disagree with the overall sentiment. I think ordinary people wanting to get in on r/wallstreebets' action are safer adopting a gambler mentality. Don't bring more than you can afford to lose. Bank enough winnings to ensure that this condition stays true. Then, feel free to make long odds bets.
- statstutor 6y ago
  > The author here is trying to make a point about EV. This is only the first of their two points (summarised at the top and bottom). The second section "Poor Bet Sizing" covers what you are trying to say. They make the second point that even if you have positive EV, the size of your bet is relevant - and the Kelly Criterion can help you decide how much to stake. The larger your bankroll, the more volatility you can stomach [the smaller your bankroll, the more "good bets" are still a personal risk] - you are agreeing with their second point, that you should think like a professional gambler.
  - dalbasal 6y ago
    Not quite. Appropriate bet sizing is related to volatility, but that doesn't make it the same. This is what I meant by imprecise definitions. Sure, two small bets are technically less volatile than one. I think this is a tricky road to walk. Whether its a diy version of modern portfolio theory, or a day trader's take on martingale system... EV doesn't matter if you're not trying getting market returns. If you very investment is a speculation, a risk. IDK what you mean specifically by "professional gambler," but most pro poker players are staked by others. That basically makes a martingale strategy viable... not unlike a "two and twenty" wall street trading firm. "Professional" in both gambling and finance are positions, not skillsets. A professional investor invests other people's money. Same with pro gamblers, generally
hahahahe 6y ago
Investment is informed gambling on human behavior. Important to note especially for HN crowd, is that Claude Shannon’s information theory is very much applicable to trading (and perhaps this is why he was so interested in trading as well). Highly recommend reading The Mathematical Theory of Communication, with this lens and focus. It’s eye opening.
runawaybottle 6y ago
Why lecture a subreddit called ‘wallstreet bets’ on gambling?
lordnacho 6y ago
This is only scratching the surface of the question. For interest, there's a very common negative expected value bet that almost everyone is required to make: insurance. We don't consider that gambling, in fact we often tell our parents to buy some when they fly on holiday. Why? The answer touches on the lottery. We care about not just the average case, we care about what might happen. Regarding Kelly criterion, there's a good reason why people don't used exactly the amount it says. If you look at the risk, ie the chance your probability is wrong, there's a chance you are overbetting.
- vasco 6y ago
  Moreover, insurance is a bet against yourself. When assessing insurance I always go through this exercise. For example, optional auto insurance when renting a car is routinely extremely overpriced. A good way to reason about it is "Would I bet $20/day that I'm going to have an accident in this car for the next 3 days?"
  - rootsofallevil 6y ago
    it would be more accurate to say: Would I bet $20/day that something will happen to this car that would make the rental car company want to be reimbursed for? Depending on rental car company the limits of scratches, dents etc .. can be very low.
    - glandium 6y ago
      And those scratches, dents, or even more could be entirely not your fault. Heck, they could even happen when you're not in the vehicle. So effectively it's a bet against you, other people and more generally the world.
- mushishi 6y ago
  I think that for the serious cases of unexpected misfortunes, an insurance is a compressor where all population events are the whole signal and individuals make the peaks (well sometimes many a person are in the same event): For the subset of people that would need an insurance without knowledge that could prevent that, the consequences should be distributed among all people. (Sure, there are exceptions if taking too big a risk.) And personally I feel most medical issues and school should be paid by the state as it would be too unfortunate if an individual should face alone the consequences -- and possibly couldn't afford for an insurance, or is likely not to buy it because has other monetary issues.
cblconfederate 6y ago
Comparison with sports and horse betting would be more apt. There the line is clearly blurred and there's barely a distinction between the two, yet sports betting is regulated as gambling
jzer0cool 6y ago
> Don’t make negative expected value bets - you are guaranteed to lose all your money in the long run. What are the positive EV values?
wruza 6y ago
For those not familiar with stock market 101, this article is pretty equivalent to «you can greet the world via echo "Hello, World!" in bash». Not that it’s not worth sharing, but Teaching everything I learnt about investing and decision making on Wall Street. Oh, god. Wall Street’s not what it used to be, apparently. Sorry for a bitter tone, but really?
paulcole 6y ago
I feel like here needs to point out the fact that gambling (including making -EV bets) isn’t necessarily bad and can be a lot of fun. You don’t always have to make smart decisions and maximize EV. YOLO! Plus like Nick the Greek said, “The next best thing in life to gambling and winning is gambling and losing.”
tobyhinloopen 6y ago
> This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1, 50% * (+2) + 50% * (-1) = +$0.50. Interesting
- deleted 6y ago
  [deleted]
- TacticalCoder 6y ago
  As as already been pointed out it's not correct. Your EV, although positive, is +$0.50 cents, not +$1. Another nitpick: in Poker you'd more see the $1 as the price to participate, and $3 as the gain (because in Poker what you put in the pot is considered "not yours" anymore). So the math is ($3 * 0.5 -$1), which also gives 50 cents and which, arguably, is more logical (but really it's a minor nitpick). As the problem is presented in the article you wouldn't see it that way but then Poker is mentioned so...
gandalfian 6y ago
Gambling is a zero sum game, your win is anothers loss. Investing is not. When it works there is literally more stuff, goods and services, for everyone! With investing you can win without others losing! That is how we all have so much more stuff than a century ago without anyone losing, we didn't liberate it from the aristocrats we invested and created it.
- chrisgd 6y ago
  But there is a buyer and seller in the transaction regardless of whether one person is gambling or investing.
  - ptero 6y ago
    And for early trades of a stock, in the analogy of the poster you replied to, the seller is a creator (inventor, builder, etc.) who needs money to build or expand and a buyer provides money for him to do that for part of future profit. That should be a profitable trade for both sides. The secondary market (where people just swap ownership) serves (spikes and manias aside) to reallocate money to more productive companies. This, by the way, is the area that is really suffering under current "only invest in indices because EMH" mantra. My 2c.
  - tekkk 6y ago
    True, but when a company sells their stock in for example IPO, it is a mutual goal of yours and theirs to see that the company rises in value.
    - chrisgd 6y ago
      Maybe. Or to buy at 19 and sell the next day at 24
  - robjan 6y ago
    That doesn't make it a zero sum game. The transaction is zero sum but not the market. If the market were zero sum, the indices would never change.
  - 6y ago
chrisgd 6y ago
Doesn’t matter, as long as you are making money.
- JacobSuperslav 6y ago
  the point is most gamblers aren't
  - chrisgd 6y ago
    There is no way to prove that. For every story of someone who lost $50k there are multiple ppl posting that they made $50k
    - JacobSuperslav 6y ago
      You're wrong. There are numerous studies about that. Retail investors have a losing hand against the big players. It's the same story as going into a casino. One of the dozens of studies on that topic: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211 Over 90%(low end estimation) of retail investors make less than inflation long term. The number fluctuates depending on the study.
theBobBob 6y ago
Obviously not really adding much real help to the conversation but I watched a sketch only a few days ago that seems pretty applicable: https://youtu.be/B_9D5jeby_8 https://youtu.be/B_9D5jeby_8
scotty79 6y ago
Trading is gambling, but slower and more often has positive expected value.
bronlund 6y ago
Everyone is gambling!
k33n 6y ago
I’m gambling. Have fun trading!
iambateman 6y ago
The book “What I learned losing a million dollars” talks about the difference between trading and gambling in more detail, and it changed the way I think about investing. It’s also just a fun read.
ab111111111 6y ago
"Gambling occurs when you have a poor understanding of risk, resulting in either (1) negative expected value bets, or (2) poor bet sizing that leads to ruin." Not so. Top poker players are still gambling, but have an excellent understanding of the risks. Their skill doesn't turn them into investors. Gambling is taking a high risk bet. Whether the expected pay off is high enough to justify the risk and whether you can afford to lose the bet is a separate issue.
- spydum 6y ago
  I thought the exact same thing. I suspect a better definition would be a wager based on random chance. Markets aren't "random", they are just suitibly complex enough to seem like it. Some people apply algorithms and emotional analysis to predict behavior. This might sound like poker, but I would argue all of the influences in a market are clearly visible. In a game of chance like poker, card ordering is still random (yes you have probability of predicting next card, but you can't see it until it happens).
  - kqr 6y ago
    Very few (if any) things in life on a non-quantum scale are actually random. Roulette results, dice throws, shuffled cards, etc, are all the results of complex and hard-to-predict processes, but they are no more random than the markets. What people mean when they say that something is random on a non-quantum scale is this: the process is so complicated and hard to predict that our best models of the process incorporate a significant amount of randomness. This is the case for markets too, where a multifractal random walk is about the best model we have.
- PragmaticPulp 6y ago
  Anecdotally, a lot of the new stock and crypto investors on the internet this year hold no illusions that they’re investing. The pop-culture mindset is that the stock market is just gambling, so they might as well bet big with long shot companies and options. The common sentiments are “I’m only investing what I can afford to lose” and “but what if this is the next GameStop/Bitcoin?” They’re entering with a mindset that betting it all is fine because they’ve mentally written off the money. I’ve been using this as an opportunity to introduce friends and family to more passive, long-term investment strategies but the skepticism is strong.
tinco 6y ago
If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don't exist in investment. You can't say a bet is negative value when you don't know the odds, and the whole reason people are making so much money market making is that no one actually knows the odds, so no one knows the "real" value of any instrument. If you're trying to say we should come up with an expected value of the bet before making it, why not give an example on how you'd try that? The reminder of the Kelly Criterion is great, and I think the article would have been better with a little more practical example of how to apply it. The first half of the article feels like it could be condensed to "Gambling is when you pick bad investments" which is ridiculous..
- jpalomaki 6y ago
  You move from "gambling" to "investing" by analyzing the target company and coming up with your view of the correct price for the stock. You then compare this price to the market price. If market price is lower, buy. Otherwise don't. This is basically the same way professional sports betting works. People involved collect information about the teams and try to understand how this information affects the outcome of the match. Once they have established their own view on the probabilities, they check the odds bookmaker if offering and calculate the expected outcome, i.e. how much money will this bet give me. If your calculations are right, then repeating this over and over again will lead to profitable betting in long term. In a sense the gambling/investing distinction is just in your own head. Maybe you are so bad at evaluation the companies that a coin toss would be better predictor for success than your Excel sheets.
- hntrader 6y ago
  "You can't say a bet is negative value when you don't know the odds" You can. The whole idea of E(V) in trading, gambling, etc, is that V is an unknown distribution, and we're trying to estimate the mean of it using a combination of empirical observation and priors given to us by experience and expertise. Nowhere in this conceptual framework is the idea that we know for sure what the density of V is.
- vardaro 6y ago
auntienomen 6y ago
The headline looks like an exception to Betteridge's Law, in that the answer is clearly yes. The crucial thing is that you don't know the true distribution of returns when you invest, trade, or speculate. There's always some probability that you're gambling, in the sense of this article
glintik 6y ago
I’m trading, hedging, gambling, gaming and investing.
ctvo 6y ago
Gambling. Especially in this environment, but the financial markets are both more available and the games have more depth than any casino near me. The ability to leverage is a lot less frictionless and doesn't include fingers getting broken when you can't cover.
Sebb767 6y ago
> Additionally just because a game involves skill, it doesn’t mean that it is not gambling, otherwise Lehman Brothers would never have collapsed. Chess involves no random elements and I doubt anyone would call it gambling. Yet you can loose in chess. I agree with his general point, but I don't think you can use the Lehman Brothers as a stand-alone gambling argument.
timwaagh 6y ago
You have made quite a few interesting posts, from valuating bitcoin to trading strategies. So I subscribed.
baking 6y ago
You are gambling if you are risk-seeking. You are investing if you are risk-adverse. Gamblers like the thrill of win-it-all or lose-it-all. Investors minimize risk while accepting some risk as a cost for higher return. Trading can be gambling or investing, or a combination of both.
- deleted 6y ago
  [deleted]
paulgb 6y ago
A couple years back I wrote an explorable explanation on the Kelly Criterion. I thought I'd share it here as it's not often the Kelly Criterion comes up around here :) https://explore.paulbutler.org/bet/ https://explore.paulbutler.org/bet/
vmception 6y ago
understanding the expected value of your financial game is important understanding that the distinction between “gambling” and “this other respected thing” is purely cultural is even more important you are facing people, around the world, who do not need to rationalize a difference for any cultural, personal, religious, legal or future legal reason. even their community does not care yet you do, you are already disadvantaged by spending any cycles on this
whatever1 6y ago
Trading stocks in America is state sponsored gambling. All of the game is based on the assumption that the stocks will (on average) always go up. They dont. Check the European stock markets that have been stagnant for 20 years. Selling lottery tickets with the promise of getting a pension. Disgusting.
- pensatoio 6y ago
  GPD per capita is significantly stronger in the USA than the EU. Over the past forty years, growth in the USA has been not only been strong, but stable (practically linear.) The EU is a very different story. My point is, I don’t think it’s fair to justify calling the US equity markets “gambling” by comparing them to the EU which is a totally different horse.
- anaphor 6y ago
  Why has the S&P 500, Russell 2k, etc all gone up over the past 20 years on average then?
  - pashamur 6y ago
    1) 20 years is a small sample size 2) The US has enjoyed the status of the world's reserve currency since 1945, which literally means the gains of the U.S. stock market are partly financed by the whole world (note that we used to have a net surplus with other countries pre-1970, but now run a deep deficit and have off-shored our domestic manufacturing base - as a result of needing to get dollars out into the system) 3) Most stock market analyses on the US stock market are done in this 1945-now period when the US has been dominant on the world stage; it's a long time in an individual's life but a short time historically. If that changes, I expect lots of things that were "always true" to no longer be true anymore. More reading: https://www.lynalden.com/fraying-petrodollar-system/ https://www.lynalden.com/fraying-petrodollar-system/
- dehrmann 6y ago
  What do you think the pension is doing with your money? At least you're gambling it in low-fee index fund. The pension is paying someone 2 and 20 to underperform.
cambalache 6y ago
> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average. And this was upvoted all the way to the top. JC this site quality is at all-time low.
Dumblydorr 6y ago
Many are neither trading nor gambling, but spending hundreds on meme stocks for the belonging and cultural value.
- hckrnrd 6y ago
  Sounds like you’re speaking from personal experience.
  - Dumblydorr 6y ago
    If WSB millions holding stocks irrationally for meme status counts as personal experience, then yes, we all do. The evidence is there for anyone to see.
anm89 6y ago
People are gambling when the buy assets you don't like and investing when they buy assets you do like. Pretty cool because it is literally impossible to lose money investing because if you did lose money it turns out you were gambling.
- hckrnrd 6y ago
  That others don’t see the blatant hypocrisy of the gambling/investing false dichotomy speaks more to their _own_ biases.
ghjghj666 6y ago
>So why is bet sizing important? This is an often overlooked concept, but it is extremely important to prevent ruin (or losing all your money). The Kelly optimal bet for many popular investments is over 100% (not that it's a good idea to invest like that). Understanding the KC often leads to less conservative investing, not more.
xwdv 6y ago
I didn’t start making massive amounts of money in trading until I realized a simple concept: Don’t take risks, make them. Essentially you provide an opportunity for others to take risky gambles and profit when they lose. So now I sell way OTM option contracts and make great consistent money. Sure a pro day trader might make more, but I make consistent money and with much less skill or accuracy required. And I still benefit from the rise in my underlying stocks as long as they don’t get assigned. Only reason this isn’t more popular is because you really need high six figures or over a million in assets to start making income you can live off of. The amount of people with that much money in liquid assets is already small, and the portion of them willing to invest actively is even smaller, so very small target audience. Also, perhaps the current market environment lends itself better to selling options than it did in the past. I’m optimistic, but ready to accept this easy money could end someday.
- benibela 6y ago
  I have started doing that as well this month with CSP But the disadvantage is the limited upside. If you just buy the stock, you could have unlimited profit if the price goes to the moon, but the option only gives 1%. And you could still lose everything, if the price goes to zero
  - xwdv 6y ago
    I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls. Only sell CSPS on down days below key support points in price. Back your CSPs using your margin power so your not tying up capital and have 100% equity investment in stocks, so you only go into margin if your CSP is assigned, and then you can just sell it off when the price recovers above cost basis, only costing you the interest of your margin loan amount per day. You could sell covered calls as well while it goes up to cover the margin interest payments.
    - benibela 6y ago
      > I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls. I have heard CSP and CC have theoretically the same returns? Except for something called "skew". Although often I am too busy to trade for some several months, and then it would probably better to hav estocks. Do you do it on individual stocks or ETFs? Unfortunately I do not have a margin account. I could apply for one
whatever1 6y ago
A Positive Expected Valued bet does not mean that it is not gambling. A couple of years ago, the MegaMillions prize was so large that the expected profit from a lottery ticket was higher than the cost of the ticket itself. Buying that ticket was still gambling. The problem with the stock market is that you gamble on speculations. And you do so without any connection to the balance sheet of the company. Most of the shareholders are not the original shareholders, that means that they never invested a single penny to the company. They only paid speculators. And these speculators paid others etc. Stock market is mostly* a glorified pump and dump scheme that looks for the greatest fool[1]. [1] https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory *exluding the IPOs and issuing of new shares where actual money flows from the investors to the balance sheets of companies.
- fractionalhare 6y ago
  > And you do so without any connection to the balance sheet of the company. This is incorrect for just about every long/short equity hedge fund.
- RhodoGSA 6y ago
  I've been doing alot of deep dive into 'Technical Analysis', picked up a couple text books on the markets and have been flipping cryto to great success lately. I've come to realise that 'Technical Analysis' is just insider trading. Us day traders come to this 'Agreement' on which technical analysis to buy and sell at. There are thousands of different 'methods' to coordinate this insider trading but if a boolinger band lines up with the bottom of linear regression chart, it's a pretty safe bet to assume other people 'Agree' to pump and dump up to some other technical analysis. Whatever you call technical analysis, I call sophisticated insider trading. It's been working out great for me, but i do feel alittle gross sometimes.
- jliptzin 6y ago
  A negative expected value bet also does not mean that it is gambling. For example, buying homeowner's or life insurance. This entire article seems to be quite obvious and should be easy intuition even for a beginner, and doesn't even try to explain how one might be able to tell whether their trading profits are due to luck or skill.
nightski 6y ago
Why is this such an interesting distinction to people? They act like by not trading you are not gambling. But at the end of the day any investment is about realizing opportunity cost. There is an opportunity cost to holding fiat/cash as well. So in a way you could argue that holding cash is gambling that the fiat/cash is going to provide a better opportunity cost than other investments. What's more interesting to me is focusing on optimizing opportunity cost (which is always a gamble at the end of the day, it's impossible to NOT gamble).
- monkeyingaround 6y ago
  correct. i think it's all just part of a slow narrative shift that is seeking to regulate the market away.
senthil_rajasek 6y ago
This article is the net sum of these two concepts, https://en.wikipedia.org/wiki/Gambler%27s_ruin https://en.wikipedia.org/wiki/Gambler%27s_ruin How to Avoid Gambler's Ruin ( using Kelly Criterion) ? https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion
vardaro 6y ago
I am not sure why people are viewing gambling in a negative light here. Investing is absolutely gambling but that does not imply investing is a bad thing. The reality is that there is no such thing as reward without any risk, you need to willing to lose something to gain something else. This is essential to option pricing, it is why low delta options are cheap and high delta options are expensive. A high delta option will have a high probability of success but will demand the investor to risk more on the position. If there wasn’t a gambling aspect to capital markets, there would be zero liquidity as nobody would deliberately take the negative expected value side of the trade.
qwasaw 6y ago
hi
emrah 6y ago
Humans are creatures of habit and emotion, so there are some patterns one can sort of predict and rely on, but I would argue what most people call investing is actually gambling. In fact, without insider knowledge, I would argue it's not possible to invest.
deleted 6y ago
[deleted]
deleted 6y ago
[deleted]
hikerclimber 6y ago
its mostly gambling options trading that is.
lend000 6y ago
Most people making active trades right now are certainly gambling, but has society really left them much choice? They can't leave their house, and boring investments are significantly underperforming because the government has committed to low bond rates and printing enough money to dissolve your mattress savings and prop up equities at all costs. Add that real estate is insanely expensive (also a consequence of artificially low interest rates), and it shouldn't be so difficult to imagine why even intelligent people are playing the short term trading game which is approximately zero sum. It seems like the only way to get ahead, and it kind of is true (even though most will fall further behind).
randomNumber7 6y ago
I can recommend this video. I read the article and it came to my mind that I have watched it a couple of years ago. The history of trading is actually connected with gambling: https://ocw.mit.edu/courses/sloan-school-of-management/15-s50-poker-theory-and-analytics-january-iap-2015/lecture-videos/poker-economics/ https://ocw.mit.edu/courses/sloan-school-of-management/15-s5...
mensetmanusman 6y ago
Everyone is doing both at the same time
theknocker 6y ago
That’s cool how he keeps using gambling terminology to refer to his own “gambling” while differentiating it from the irresponsible trogs’ gambling. I wish all finance shills were as transparent about their ridiculous double standard.
dfdz 6y ago
> A 101 on not gambling: Don’t make negative expected value bets This advice seems like a good general rule of thumb, but I don’t think it holds up on scrutiny. For example, I consider all purchases I make to be investments. I am a safe driver, but still decided to pay for comprehensive car insurance (above what is required by law). I understand this investment has a negative expected value, but helps to reduce the variance of my “portfolio”. Similarly, if there is a large planned withdrawal from a brokerage account in a year, I could imagine someone buying some slightly below the money puts on the assets (with negative expected value). Now you could argue that the bet as a whole has a positive expected value.... maybe the advice could be better phrased as “make sure that in sum your investments have a positive expected value”....

mgh2 6y ago

What about investing? The current narrative is more like “robinhood stealing” by whatever means

It's an artificial distinction. If you are wealthy, you have access to opportunities with good odds, call it trading and tell everyone about it so they know you are a sophisticated and wise investor. If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible.

rustypython 6y ago
I don't think the odds is really part of the distinction. If you find a way to "gamble" with positive expectation, by profiting from sports betting markets for example, you are still labelled irresponsible and reckless compared to real "investors" who buy stocks, even when those bets are clearly unwise.
superbcarrot 6y ago
> If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible. And rightly so. For two main reasons - demonstrably negative expected value of the bets (like in casino floor games or the lottery) - relatively high proportion of total net worth wagered I'm very comfortable with labeling this as irresponsible (regardless of levels of wealth). It's not just a case of "everyone does it but only poor people are shamed for it", there's a clear distinction between the two cases.
- Bakary 6y ago
  The more useful interpretation of the argument is that it's another form of justifying the social order through cultural perception of the inherent worth of people in each class i.e. everything a wealthy person does thanks to wealth is traditionally promoted as a sign of their inherent worth, and everything a poor person does out of the conditions of poverty is interpreted as a sign of their fundamental roughness. This is especially true in a Protestant context of wealth being an indication of divine favor.
IgorPartola 6y ago
I tend to agree. Trading stocks is essentially gambling but almost worse. The odds are rigged but you don’t know by whom abs how much. It’s a game of skill, except not entirely. The house always wins except there are multiple houses and you can lose to all of them. I think investing is a different beast: that is going long on a company, industry, or the market in general. You reasonably know that the market will over time go up. With specific industries or stocks you take a bit more risk but you are still buying ownership of a thing and things tend to become more expensive over time unless a better thing comes along. But short term gains chasing, especially as a retail investor is just gambling.
- midasuni 6y ago
  Stick a 1% tax on all share buys and use to reduce income tax for working people, or just issue it as a cheque at the end of the year that people can invest. That doesn’t harm investing
  - catmanjan 6y ago
    Uh, that's a great idea, has this ever been proposed formally?
    - deleted 6y ago
      [deleted]
    - spiralx 6y ago
      Financial transaction taxes have been introduced in any number of countries, the majority of which have ended up repealing them: the tax raised on transactions is outweighed by the loss of capital gains caused by a reduced number of transactions occurring. And in today's global financial system you could end up like Sweden, where introducing an FTT saw 80% of trading move to London within a year...
  - nemo44x 6y ago
    The Net Investment Tax is a better way and already exists. It taxes actual gains over a threshold so “the little guy” is unlikely to pay.
naveen99 6y ago
When you are poor, your discretionary investments are a small fraction of your future income. So you can afford to blow out your brokerage account a few times. In a way, college, marriage, and kids are leveraged bets on your future income so they are more risky than gambling past income. When you are wealthy you have to be more disciplined and pace yourself. The only thing you thing that you can’t slow down the pace of is time.

eterps 6y ago

I think this is an interesting concept for gambling: https://pooltogether.com https://pooltogether.com

scribu 6y ago
Ah, a lottery on a blockchain. Why not! Except, unlike a national lottery, you can't trust the issuer and the value of your prize fluctuates even after you win.
- eterps 6y ago
  I was referring to the concept, not whether it is centralized or decentralized. Most blockchain applications don't need one to function.
- dannyw 6y ago
  1. Blockchains actually allow for "provably-fair" (cryptographically determined) lotteries. A lot more fair and trasparent than national ones. 2. This specific lottery uses stablecoins, with a value tied to the US dollar. So both of your points are invalid here.

TomGullen 6y ago

Working out EV is easy for casino table games, relatively easy for poker and extremely difficult for stocks trading.

oh_sigh 6y ago
Yes...bet sizing is something I worry about a lot, but it isn't clear to me how to apply the kelly criterion to a game where the risk/reward is mostly unknown and only based on a hunch.
- scribu 6y ago
  One better-than-nothing way is to look at historical data: Looking at the closing price for each trading day, count how many times the stock ended higher and how many times it ended lower than the previous day. Then you have your odds.
- hgjnhikn 6y ago
  You could make a table where row is guessed probability(input to Kelly criterion) and column it's actual probability and cells contain expected value and expected log value. And pick something which looks reasonable.
tchalla 6y ago
The reason is pretty simple - probability of events are an important input to calculation of expected values. If the probabilities are off, expected value calculations will differ. Also, Expected Value works under the “law of large numbers” assumptions. That in turn brings into picture the “sequence of return” risk. Two drastically different sequences can lead to the same Expected Value but can have serious short term implications. “The market can remain irrational longer than you can remain solvent.”
- superbcarrot 6y ago
  > Also, Expected Value works under the “law of large numbers” assumptions. Technically, EV has nothing to do with sample size. But I get your point that in sufficiently small sample sizes and/or sufficiently large bet sizes you might need to think about utility rather than expectation.

hendler 6y ago

Eric Ries's https://ltse.com/ https://ltse.com/ is one alternative.

konjin 6y ago

Gambling and I know it.

21stio 6y ago

Hey Chris, thanks for sharing the article. I think I spotted a minor logical error in it tho. > This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1. 50% * (+2) + 50% * (-1) = +$1. Isn’t it an average gain of $ 50ct per coin flip? That way the calculation would be correct aswell.

TulliusCicero 6y ago
Yeah, I'm also pretty confident it's an average of +50 cents per flip. E.g. if you get 50 heads and 50 tails in 100 flips, that's +$50, which maps to 50 cents per flip.
christopherjgan 6y ago
Good pick up!

elygre 6y ago

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else. The idea was looking at the how well the company would perform. Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. The idea was looking at how well the stock would perform. Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Day trading would be the example here, profiting mainly on marketplace dynamics, no matter the stock. The idea was looking at how to be a better player than the others. Then he talked about how the game perspective was the only model that really matched the marketplace, and how the stock market had evolved from being place where people would invest in companies, to a place where they would play a game with other peopl.

WalterBright 6y ago
> the game perspective was the only model that really matched the marketplace I don't buy that. If a company consistently grows and makes money, its stock is going up. The stock value is always going to revert to what the company is doing.
IgorPartola 6y ago
That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.
- TeMPOraL 6y ago

choonway 6y ago

trading is gambling. the only difference is the risk and insider info.

curiousgal 6y ago
It's always funny to read such generalizations. You will (almost) never find a trading desk at a bank that takes a directional position on an asset, i.e. gamble. The entire foundation of quantitative finance rests on hedging and replication. If I sell an option contract for $x then I must use that $x to build a portfolio that would compensate my potential loss on the option that I sold you.

uyt 6y ago

> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average. Expected value doesn't tell you much about the outcome of successive bets. Someone else can probably explain this better since it comes up on HN a lot (something about ergodicity and the difference between ensemble average and time average). Quick example is if play a game of double or nothing on coin flips. This is a "fair game" because you pay x and get back 2x * 0.5 + 0 * 0.5 = x. But if you play more than one game you will very quickly get a "nothing" and can't continue.

chillydawg 6y ago
Kelly staking criteria tells you how much to bet in such situations. in this case: nothing since it's a pointless bet, economically speaking. you may derive utility from the lols, though, in which case probably don't bet the whole bank in one go!
- dmurray 6y ago
  The Kelly criterion doesn't apply in this scenario. Imagine the same game, but it's triple or nothing (so, the odds are massively in your favour) and you can walk away at any time after resolving a bet, after which you go back to investing in Treasuries or low-cost index funds. How much should you wager? Kelly says 25% (edge of 50% / odds of 2). But this is correct only under the assumption that you will have infinitely many opportunities to play the same game at the same odds for whatever stake you choose. If you only have one chance, you should bet more. It also assumes a linear utility value of money: assuming this is actually convex, you should bet less.

dalbasal 6y ago

This is totally meta but... this style of writing or rhetoric is prone to "semantic not concept" problems. Gambling, Trading or Investing don't have strict enough meanings to withstand a "socrates is a man" analysis... The author here is trying to make a point about EV. IE, a player is gambling, but the house is investing because positive or negative EV. I disagree. IMO, negative or positive EV is not what separates house from punter. What separates house from punter is volatility. The house's risk is spread over many bets, and so EV (positive or negative) is a good predictor of performance. Punters don't spread their risk. Roulette with positive EV is still gambling... it's just a "good bet." Obviously, the house tries to only offer bad bets. Skill games (both the author and gaming authorities agree) can still be gambling... though skill games can give players/gamblers a positive EV. I also, kind of, disagree with the overall sentiment. I think ordinary people wanting to get in on r/wallstreebets' action are safer adopting a gambler mentality. Don't bring more than you can afford to lose. Bank enough winnings to ensure that this condition stays true. Then, feel free to make long odds bets.

statstutor 6y ago
> The author here is trying to make a point about EV. This is only the first of their two points (summarised at the top and bottom). The second section "Poor Bet Sizing" covers what you are trying to say. They make the second point that even if you have positive EV, the size of your bet is relevant - and the Kelly Criterion can help you decide how much to stake. The larger your bankroll, the more volatility you can stomach [the smaller your bankroll, the more "good bets" are still a personal risk] - you are agreeing with their second point, that you should think like a professional gambler.
- dalbasal 6y ago
  Not quite. Appropriate bet sizing is related to volatility, but that doesn't make it the same. This is what I meant by imprecise definitions. Sure, two small bets are technically less volatile than one. I think this is a tricky road to walk. Whether its a diy version of modern portfolio theory, or a day trader's take on martingale system... EV doesn't matter if you're not trying getting market returns. If you very investment is a speculation, a risk. IDK what you mean specifically by "professional gambler," but most pro poker players are staked by others. That basically makes a martingale strategy viable... not unlike a "two and twenty" wall street trading firm. "Professional" in both gambling and finance are positions, not skillsets. A professional investor invests other people's money. Same with pro gamblers, generally

hahahahe 6y ago

Investment is informed gambling on human behavior. Important to note especially for HN crowd, is that Claude Shannon’s information theory is very much applicable to trading (and perhaps this is why he was so interested in trading as well). Highly recommend reading The Mathematical Theory of Communication, with this lens and focus. It’s eye opening.

runawaybottle 6y ago

Why lecture a subreddit called ‘wallstreet bets’ on gambling?

lordnacho 6y ago

This is only scratching the surface of the question. For interest, there's a very common negative expected value bet that almost everyone is required to make: insurance. We don't consider that gambling, in fact we often tell our parents to buy some when they fly on holiday. Why? The answer touches on the lottery. We care about not just the average case, we care about what might happen. Regarding Kelly criterion, there's a good reason why people don't used exactly the amount it says. If you look at the risk, ie the chance your probability is wrong, there's a chance you are overbetting.

vasco 6y ago
Moreover, insurance is a bet against yourself. When assessing insurance I always go through this exercise. For example, optional auto insurance when renting a car is routinely extremely overpriced. A good way to reason about it is "Would I bet $20/day that I'm going to have an accident in this car for the next 3 days?"
- rootsofallevil 6y ago
  it would be more accurate to say: Would I bet $20/day that something will happen to this car that would make the rental car company want to be reimbursed for? Depending on rental car company the limits of scratches, dents etc .. can be very low.
  - glandium 6y ago
    And those scratches, dents, or even more could be entirely not your fault. Heck, they could even happen when you're not in the vehicle. So effectively it's a bet against you, other people and more generally the world.
mushishi 6y ago
I think that for the serious cases of unexpected misfortunes, an insurance is a compressor where all population events are the whole signal and individuals make the peaks (well sometimes many a person are in the same event): For the subset of people that would need an insurance without knowledge that could prevent that, the consequences should be distributed among all people. (Sure, there are exceptions if taking too big a risk.) And personally I feel most medical issues and school should be paid by the state as it would be too unfortunate if an individual should face alone the consequences -- and possibly couldn't afford for an insurance, or is likely not to buy it because has other monetary issues.

cblconfederate 6y ago

Comparison with sports and horse betting would be more apt. There the line is clearly blurred and there's barely a distinction between the two, yet sports betting is regulated as gambling

jzer0cool 6y ago

> Don’t make negative expected value bets - you are guaranteed to lose all your money in the long run. What are the positive EV values?

wruza 6y ago

For those not familiar with stock market 101, this article is pretty equivalent to «you can greet the world via echo "Hello, World!" in bash». Not that it’s not worth sharing, but Teaching everything I learnt about investing and decision making on Wall Street. Oh, god. Wall Street’s not what it used to be, apparently. Sorry for a bitter tone, but really?

paulcole 6y ago

I feel like here needs to point out the fact that gambling (including making -EV bets) isn’t necessarily bad and can be a lot of fun. You don’t always have to make smart decisions and maximize EV. YOLO! Plus like Nick the Greek said, “The next best thing in life to gambling and winning is gambling and losing.”

tobyhinloopen 6y ago

> This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1, 50% * (+2) + 50% * (-1) = +$0.50. Interesting

deleted 6y ago
[deleted]
TacticalCoder 6y ago
As as already been pointed out it's not correct. Your EV, although positive, is +$0.50 cents, not +$1. Another nitpick: in Poker you'd more see the $1 as the price to participate, and $3 as the gain (because in Poker what you put in the pot is considered "not yours" anymore). So the math is ($3 * 0.5 -$1), which also gives 50 cents and which, arguably, is more logical (but really it's a minor nitpick). As the problem is presented in the article you wouldn't see it that way but then Poker is mentioned so...

gandalfian 6y ago

Gambling is a zero sum game, your win is anothers loss. Investing is not. When it works there is literally more stuff, goods and services, for everyone! With investing you can win without others losing! That is how we all have so much more stuff than a century ago without anyone losing, we didn't liberate it from the aristocrats we invested and created it.

chrisgd 6y ago
But there is a buyer and seller in the transaction regardless of whether one person is gambling or investing.
- ptero 6y ago
  And for early trades of a stock, in the analogy of the poster you replied to, the seller is a creator (inventor, builder, etc.) who needs money to build or expand and a buyer provides money for him to do that for part of future profit. That should be a profitable trade for both sides. The secondary market (where people just swap ownership) serves (spikes and manias aside) to reallocate money to more productive companies. This, by the way, is the area that is really suffering under current "only invest in indices because EMH" mantra. My 2c.
- tekkk 6y ago
  True, but when a company sells their stock in for example IPO, it is a mutual goal of yours and theirs to see that the company rises in value.
  - chrisgd 6y ago
    Maybe. Or to buy at 19 and sell the next day at 24
- robjan 6y ago
  That doesn't make it a zero sum game. The transaction is zero sum but not the market. If the market were zero sum, the indices would never change.
- 6y ago

chrisgd 6y ago

Doesn’t matter, as long as you are making money.

JacobSuperslav 6y ago
the point is most gamblers aren't
- chrisgd 6y ago
  There is no way to prove that. For every story of someone who lost $50k there are multiple ppl posting that they made $50k
  - JacobSuperslav 6y ago
    You're wrong. There are numerous studies about that. Retail investors have a losing hand against the big players. It's the same story as going into a casino. One of the dozens of studies on that topic: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211 Over 90%(low end estimation) of retail investors make less than inflation long term. The number fluctuates depending on the study.

theBobBob 6y ago

Obviously not really adding much real help to the conversation but I watched a sketch only a few days ago that seems pretty applicable: https://youtu.be/B_9D5jeby_8 https://youtu.be/B_9D5jeby_8

scotty79 6y ago

Trading is gambling, but slower and more often has positive expected value.

bronlund 6y ago

Everyone is gambling!

k33n 6y ago

I’m gambling. Have fun trading!

iambateman 6y ago

The book “What I learned losing a million dollars” talks about the difference between trading and gambling in more detail, and it changed the way I think about investing. It’s also just a fun read.

ab111111111 6y ago

"Gambling occurs when you have a poor understanding of risk, resulting in either (1) negative expected value bets, or (2) poor bet sizing that leads to ruin." Not so. Top poker players are still gambling, but have an excellent understanding of the risks. Their skill doesn't turn them into investors. Gambling is taking a high risk bet. Whether the expected pay off is high enough to justify the risk and whether you can afford to lose the bet is a separate issue.

spydum 6y ago
I thought the exact same thing. I suspect a better definition would be a wager based on random chance. Markets aren't "random", they are just suitibly complex enough to seem like it. Some people apply algorithms and emotional analysis to predict behavior. This might sound like poker, but I would argue all of the influences in a market are clearly visible. In a game of chance like poker, card ordering is still random (yes you have probability of predicting next card, but you can't see it until it happens).
- kqr 6y ago
  Very few (if any) things in life on a non-quantum scale are actually random. Roulette results, dice throws, shuffled cards, etc, are all the results of complex and hard-to-predict processes, but they are no more random than the markets. What people mean when they say that something is random on a non-quantum scale is this: the process is so complicated and hard to predict that our best models of the process incorporate a significant amount of randomness. This is the case for markets too, where a multifractal random walk is about the best model we have.
PragmaticPulp 6y ago
Anecdotally, a lot of the new stock and crypto investors on the internet this year hold no illusions that they’re investing. The pop-culture mindset is that the stock market is just gambling, so they might as well bet big with long shot companies and options. The common sentiments are “I’m only investing what I can afford to lose” and “but what if this is the next GameStop/Bitcoin?” They’re entering with a mindset that betting it all is fine because they’ve mentally written off the money. I’ve been using this as an opportunity to introduce friends and family to more passive, long-term investment strategies but the skepticism is strong.

tinco 6y ago

If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don't exist in investment. You can't say a bet is negative value when you don't know the odds, and the whole reason people are making so much money market making is that no one actually knows the odds, so no one knows the "real" value of any instrument. If you're trying to say we should come up with an expected value of the bet before making it, why not give an example on how you'd try that? The reminder of the Kelly Criterion is great, and I think the article would have been better with a little more practical example of how to apply it. The first half of the article feels like it could be condensed to "Gambling is when you pick bad investments" which is ridiculous..

jpalomaki 6y ago
You move from "gambling" to "investing" by analyzing the target company and coming up with your view of the correct price for the stock. You then compare this price to the market price. If market price is lower, buy. Otherwise don't. This is basically the same way professional sports betting works. People involved collect information about the teams and try to understand how this information affects the outcome of the match. Once they have established their own view on the probabilities, they check the odds bookmaker if offering and calculate the expected outcome, i.e. how much money will this bet give me. If your calculations are right, then repeating this over and over again will lead to profitable betting in long term. In a sense the gambling/investing distinction is just in your own head. Maybe you are so bad at evaluation the companies that a coin toss would be better predictor for success than your Excel sheets.
hntrader 6y ago
"You can't say a bet is negative value when you don't know the odds" You can. The whole idea of E(V) in trading, gambling, etc, is that V is an unknown distribution, and we're trying to estimate the mean of it using a combination of empirical observation and priors given to us by experience and expertise. Nowhere in this conceptual framework is the idea that we know for sure what the density of V is.
vardaro 6y ago

auntienomen 6y ago

The headline looks like an exception to Betteridge's Law, in that the answer is clearly yes. The crucial thing is that you don't know the true distribution of returns when you invest, trade, or speculate. There's always some probability that you're gambling, in the sense of this article

glintik 6y ago

I’m trading, hedging, gambling, gaming and investing.

ctvo 6y ago

Gambling. Especially in this environment, but the financial markets are both more available and the games have more depth than any casino near me. The ability to leverage is a lot less frictionless and doesn't include fingers getting broken when you can't cover.

Sebb767 6y ago

> Additionally just because a game involves skill, it doesn’t mean that it is not gambling, otherwise Lehman Brothers would never have collapsed. Chess involves no random elements and I doubt anyone would call it gambling. Yet you can loose in chess. I agree with his general point, but I don't think you can use the Lehman Brothers as a stand-alone gambling argument.

timwaagh 6y ago

You have made quite a few interesting posts, from valuating bitcoin to trading strategies. So I subscribed.

baking 6y ago

You are gambling if you are risk-seeking. You are investing if you are risk-adverse. Gamblers like the thrill of win-it-all or lose-it-all. Investors minimize risk while accepting some risk as a cost for higher return. Trading can be gambling or investing, or a combination of both.

deleted 6y ago
[deleted]

paulgb 6y ago

A couple years back I wrote an explorable explanation on the Kelly Criterion. I thought I'd share it here as it's not often the Kelly Criterion comes up around here :) https://explore.paulbutler.org/bet/ https://explore.paulbutler.org/bet/

vmception 6y ago

understanding the expected value of your financial game is important understanding that the distinction between “gambling” and “this other respected thing” is purely cultural is even more important you are facing people, around the world, who do not need to rationalize a difference for any cultural, personal, religious, legal or future legal reason. even their community does not care yet you do, you are already disadvantaged by spending any cycles on this

whatever1 6y ago

Trading stocks in America is state sponsored gambling. All of the game is based on the assumption that the stocks will (on average) always go up. They dont. Check the European stock markets that have been stagnant for 20 years. Selling lottery tickets with the promise of getting a pension. Disgusting.

pensatoio 6y ago
GPD per capita is significantly stronger in the USA than the EU. Over the past forty years, growth in the USA has been not only been strong, but stable (practically linear.) The EU is a very different story. My point is, I don’t think it’s fair to justify calling the US equity markets “gambling” by comparing them to the EU which is a totally different horse.
anaphor 6y ago
Why has the S&P 500, Russell 2k, etc all gone up over the past 20 years on average then?
- pashamur 6y ago
  1) 20 years is a small sample size 2) The US has enjoyed the status of the world's reserve currency since 1945, which literally means the gains of the U.S. stock market are partly financed by the whole world (note that we used to have a net surplus with other countries pre-1970, but now run a deep deficit and have off-shored our domestic manufacturing base - as a result of needing to get dollars out into the system) 3) Most stock market analyses on the US stock market are done in this 1945-now period when the US has been dominant on the world stage; it's a long time in an individual's life but a short time historically. If that changes, I expect lots of things that were "always true" to no longer be true anymore. More reading: https://www.lynalden.com/fraying-petrodollar-system/ https://www.lynalden.com/fraying-petrodollar-system/
dehrmann 6y ago
What do you think the pension is doing with your money? At least you're gambling it in low-fee index fund. The pension is paying someone 2 and 20 to underperform.

cambalache 6y ago

> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average. And this was upvoted all the way to the top. JC this site quality is at all-time low.

Dumblydorr 6y ago

Many are neither trading nor gambling, but spending hundreds on meme stocks for the belonging and cultural value.

hckrnrd 6y ago
Sounds like you’re speaking from personal experience.
- Dumblydorr 6y ago
  If WSB millions holding stocks irrationally for meme status counts as personal experience, then yes, we all do. The evidence is there for anyone to see.

anm89 6y ago

People are gambling when the buy assets you don't like and investing when they buy assets you do like. Pretty cool because it is literally impossible to lose money investing because if you did lose money it turns out you were gambling.

hckrnrd 6y ago
That others don’t see the blatant hypocrisy of the gambling/investing false dichotomy speaks more to their _own_ biases.

ghjghj666 6y ago

>So why is bet sizing important? This is an often overlooked concept, but it is extremely important to prevent ruin (or losing all your money). The Kelly optimal bet for many popular investments is over 100% (not that it's a good idea to invest like that). Understanding the KC often leads to less conservative investing, not more.

xwdv 6y ago

I didn’t start making massive amounts of money in trading until I realized a simple concept: Don’t take risks, make them. Essentially you provide an opportunity for others to take risky gambles and profit when they lose. So now I sell way OTM option contracts and make great consistent money. Sure a pro day trader might make more, but I make consistent money and with much less skill or accuracy required. And I still benefit from the rise in my underlying stocks as long as they don’t get assigned. Only reason this isn’t more popular is because you really need high six figures or over a million in assets to start making income you can live off of. The amount of people with that much money in liquid assets is already small, and the portion of them willing to invest actively is even smaller, so very small target audience. Also, perhaps the current market environment lends itself better to selling options than it did in the past. I’m optimistic, but ready to accept this easy money could end someday.

benibela 6y ago
I have started doing that as well this month with CSP But the disadvantage is the limited upside. If you just buy the stock, you could have unlimited profit if the price goes to the moon, but the option only gives 1%. And you could still lose everything, if the price goes to zero
- xwdv 6y ago
  I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls. Only sell CSPS on down days below key support points in price. Back your CSPs using your margin power so your not tying up capital and have 100% equity investment in stocks, so you only go into margin if your CSP is assigned, and then you can just sell it off when the price recovers above cost basis, only costing you the interest of your margin loan amount per day. You could sell covered calls as well while it goes up to cover the margin interest payments.
  - benibela 6y ago
    > I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls. I have heard CSP and CC have theoretically the same returns? Except for something called "skew". Although often I am too busy to trade for some several months, and then it would probably better to hav estocks. Do you do it on individual stocks or ETFs? Unfortunately I do not have a margin account. I could apply for one

whatever1 6y ago

A Positive Expected Valued bet does not mean that it is not gambling. A couple of years ago, the MegaMillions prize was so large that the expected profit from a lottery ticket was higher than the cost of the ticket itself. Buying that ticket was still gambling. The problem with the stock market is that you gamble on speculations. And you do so without any connection to the balance sheet of the company. Most of the shareholders are not the original shareholders, that means that they never invested a single penny to the company. They only paid speculators. And these speculators paid others etc. Stock market is mostly* a glorified pump and dump scheme that looks for the greatest fool[1]. [1] https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory *exluding the IPOs and issuing of new shares where actual money flows from the investors to the balance sheets of companies.

fractionalhare 6y ago
> And you do so without any connection to the balance sheet of the company. This is incorrect for just about every long/short equity hedge fund.
RhodoGSA 6y ago
I've been doing alot of deep dive into 'Technical Analysis', picked up a couple text books on the markets and have been flipping cryto to great success lately. I've come to realise that 'Technical Analysis' is just insider trading. Us day traders come to this 'Agreement' on which technical analysis to buy and sell at. There are thousands of different 'methods' to coordinate this insider trading but if a boolinger band lines up with the bottom of linear regression chart, it's a pretty safe bet to assume other people 'Agree' to pump and dump up to some other technical analysis. Whatever you call technical analysis, I call sophisticated insider trading. It's been working out great for me, but i do feel alittle gross sometimes.
jliptzin 6y ago
A negative expected value bet also does not mean that it is gambling. For example, buying homeowner's or life insurance. This entire article seems to be quite obvious and should be easy intuition even for a beginner, and doesn't even try to explain how one might be able to tell whether their trading profits are due to luck or skill.

nightski 6y ago

Why is this such an interesting distinction to people? They act like by not trading you are not gambling. But at the end of the day any investment is about realizing opportunity cost. There is an opportunity cost to holding fiat/cash as well. So in a way you could argue that holding cash is gambling that the fiat/cash is going to provide a better opportunity cost than other investments. What's more interesting to me is focusing on optimizing opportunity cost (which is always a gamble at the end of the day, it's impossible to NOT gamble).

monkeyingaround 6y ago
correct. i think it's all just part of a slow narrative shift that is seeking to regulate the market away.

senthil_rajasek 6y ago

This article is the net sum of these two concepts, https://en.wikipedia.org/wiki/Gambler%27s_ruin https://en.wikipedia.org/wiki/Gambler%27s_ruin How to Avoid Gambler's Ruin ( using Kelly Criterion) ? https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion

vardaro 6y ago

I am not sure why people are viewing gambling in a negative light here. Investing is absolutely gambling but that does not imply investing is a bad thing. The reality is that there is no such thing as reward without any risk, you need to willing to lose something to gain something else. This is essential to option pricing, it is why low delta options are cheap and high delta options are expensive. A high delta option will have a high probability of success but will demand the investor to risk more on the position. If there wasn’t a gambling aspect to capital markets, there would be zero liquidity as nobody would deliberately take the negative expected value side of the trade.

qwasaw 6y ago

emrah 6y ago

Humans are creatures of habit and emotion, so there are some patterns one can sort of predict and rely on, but I would argue what most people call investing is actually gambling. In fact, without insider knowledge, I would argue it's not possible to invest.

deleted 6y ago

[deleted]

deleted 6y ago

[deleted]

hikerclimber 6y ago

its mostly gambling options trading that is.

lend000 6y ago

Most people making active trades right now are certainly gambling, but has society really left them much choice? They can't leave their house, and boring investments are significantly underperforming because the government has committed to low bond rates and printing enough money to dissolve your mattress savings and prop up equities at all costs. Add that real estate is insanely expensive (also a consequence of artificially low interest rates), and it shouldn't be so difficult to imagine why even intelligent people are playing the short term trading game which is approximately zero sum. It seems like the only way to get ahead, and it kind of is true (even though most will fall further behind).

randomNumber7 6y ago

I can recommend this video. I read the article and it came to my mind that I have watched it a couple of years ago. The history of trading is actually connected with gambling: https://ocw.mit.edu/courses/sloan-school-of-management/15-s50-poker-theory-and-analytics-january-iap-2015/lecture-videos/poker-economics/ https://ocw.mit.edu/courses/sloan-school-of-management/15-s5...

mensetmanusman 6y ago

Everyone is doing both at the same time

theknocker 6y ago

That’s cool how he keeps using gambling terminology to refer to his own “gambling” while differentiating it from the irresponsible trogs’ gambling. I wish all finance shills were as transparent about their ridiculous double standard.

dfdz 6y ago

> A 101 on not gambling: Don’t make negative expected value bets This advice seems like a good general rule of thumb, but I don’t think it holds up on scrutiny. For example, I consider all purchases I make to be investments. I am a safe driver, but still decided to pay for comprehensive car insurance (above what is required by law). I understand this investment has a negative expected value, but helps to reduce the variance of my “portfolio”. Similarly, if there is a large planned withdrawal from a brokerage account in a year, I could imagine someone buying some slightly below the money puts on the assets (with negative expected value). Now you could argue that the bet as a whole has a positive expected value.... maybe the advice could be better phrased as “make sure that in sum your investments have a positive expected value”....