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I can't find a meaningful distinction between gambling and investing. It's not about knowledge / skill (picking index funds blindly is actually recommended for

by bko 5y ago

I can't find a meaningful distinction between gambling and investing. It's not about knowledge / skill (picking index funds blindly is actually recommended form of investing these days) It's not about odds (lottery with positive return is gambling, and insurance with negative return is not) It's not about frequency (we're encouraged to contribute to 401k on every paycheck but not to play the lottery every week) And to top it off, if you have a positive expected return on gambling (pro poker player, hedge fund manager), it stops being gambling either. https://mleverything.substack.com/p/gambling-versus-investing https://mleverything.substack.com/p/gambling-versus-investin...

Closi 5y ago
Well there is a meaningful difference between gambling and investing, but probably not between gambling and day-trading on limited information. Investing is a broad term that ranges all the way from buying a property to lease to short selling GameStop. Investing is technically a gamble, but a characteristic of gambling in common language usage is the ability to get quick returns - we don’t usually use the phrase gambling to describe something that involves a 3% annual return. It’s also not usually called a gamble if you can spread your ‘bets’ enough to provide a high confidence of a low return (eg why the insurance industry isn’t usually called gambling, even though an individual transaction will be a win/loss from a profit loss perspective).
- pjc50 5y ago
  > why the insurance industry isn’t usually called gambling I feel that both the Lloyds names (https://www.theguardian.com/money/2000/nov/04/business.personalfinancenews1 https://www.theguardian.com/money/2000/nov/04/business.perso...) and the famous https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management were engaged in a gambling-like strategy - positive expected return with possible downside vastly exceeding initial investment - even if it doesn't "feel like" gambling. But there isn't really a good phrase for that. Finance people sometimes say "picking up pennies in front of a steamroller".
  - Closi 5y ago
    Yeah, I think I'm just saying if you use a broad enough definition for gambling then everything in the world is gambling through a certain lens (i.e. Apple are gambling that a nuclear device doesn't get detonated in Cupertino).
pjc50 5y ago
It's a distinction of degree; is crossing the road gambling? Or is it an extreme sport given that it's a physical activity with a risk of death? No, that just renders the categories useless. One of the sibling comments talks about adrenalin; perhaps (and this is only half joking) it's like the "sexual content" censorship boundary in that it's only bad if people enjoy it.
dan-robertson 5y ago
Ordinary investing tends to be positive expectancy and positive-sum. That is, there are economic reasons to expect stock prices to go up so both parties to a trade can gain instead of one making a gain equal to the other’s loss. Gambling is either negative expectancy* with a bookie/casino or zero-sum. The zero-sum case is a bit more interesting: if you are better at betting then you can make a profit, but the people who succeed are not problem gamblers. There is probably some argument to be made that trading some financial instruments in certain ways is similar to this latter type of gambling. So my claim is basically that investing is an activity that should be positive sum and gambling is not. * if you are smarter than the casino or bookie you will be kicked out so maybe you can make a small positive amount of money.
- imtringued 5y ago
  Trading is an activity with supply and demand for trading. It's behaving like any old business. You're offering a product to a customer (the investors). The problem with this is obviously that consumer markets can be saturated. The number of investors does not grow with the number of traders. Adding more traders just results in a fight for market share. When traders are pretending that other traders are their customers they basically started a game of musical chairs where someone has to lose.
- bko 5y ago
  It's not just about the instrument because you can gamble with stocks, which in general have positive expectancy and positive sum. Day trading meme stocks is definitely gambling, so I would say it also has to do with behavior.
  - cehrlich 5y ago
    I agree there is a big difference between day trading meme stocks and sticking your money in an MSCI World Index Fund or whatever. That being said, I still constantly feel tempted to check how my portfolio of very boring index funds is doing, despite having absolutely no intention of selling anything for many years.
Barrin92 5y ago
quite a lot of forms of investing are pretty much gambling but one key distinction is that investing has a market function, it's a price discovery mechanism. Investors who lose in a market still serve a purpose. even if individual investors might incur losses at the very least there are external benefits to their behaviour for everyone else. Without active investing allocation of capital does not work. gambling taking place in purely isolated environments has no such benefit.
whiskyant 5y ago
Picking successful long term investments is highly knowledge/conviction/skill based. Picking winners consistently is very doable for a good investor.
- tejohnso 5y ago
  But that just further muddies the distinction between gambling and investing if you contrast with poker. Poker is highly skill/knowledge based. Winning tournaments consistently is very doable for a good player. In both cases "consistently" doesn't mean without losing from time to time. Even Buffet makes mistakes. As does Negreanu.
- zeckalpha 5y ago
  A Random Walk Down Wallstreet illustrates it is luck. To claim it is skill is survivor bias.
  - acdha 5y ago
    That’s not quite right: that book is about consistently, significantly outperforming the market. That doesn’t mean that you can’t invest and see consistent solid returns, unlike gambling, but sets a ceiling on how much you can sustainably expect.

by bko 5y ago

Closi 5y ago

Well there is a meaningful difference between gambling and investing, but probably not between gambling and day-trading on limited information. Investing is a broad term that ranges all the way from buying a property to lease to short selling GameStop. Investing is technically a gamble, but a characteristic of gambling in common language usage is the ability to get quick returns - we don’t usually use the phrase gambling to describe something that involves a 3% annual return. It’s also not usually called a gamble if you can spread your ‘bets’ enough to provide a high confidence of a low return (eg why the insurance industry isn’t usually called gambling, even though an individual transaction will be a win/loss from a profit loss perspective).

pjc50 5y ago
> why the insurance industry isn’t usually called gambling I feel that both the Lloyds names (https://www.theguardian.com/money/2000/nov/04/business.personalfinancenews1 https://www.theguardian.com/money/2000/nov/04/business.perso...) and the famous https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management were engaged in a gambling-like strategy - positive expected return with possible downside vastly exceeding initial investment - even if it doesn't "feel like" gambling. But there isn't really a good phrase for that. Finance people sometimes say "picking up pennies in front of a steamroller".
- Closi 5y ago
  Yeah, I think I'm just saying if you use a broad enough definition for gambling then everything in the world is gambling through a certain lens (i.e. Apple are gambling that a nuclear device doesn't get detonated in Cupertino).

pjc50 5y ago

It's a distinction of degree; is crossing the road gambling? Or is it an extreme sport given that it's a physical activity with a risk of death? No, that just renders the categories useless. One of the sibling comments talks about adrenalin; perhaps (and this is only half joking) it's like the "sexual content" censorship boundary in that it's only bad if people enjoy it.

dan-robertson 5y ago

Ordinary investing tends to be positive expectancy and positive-sum. That is, there are economic reasons to expect stock prices to go up so both parties to a trade can gain instead of one making a gain equal to the other’s loss. Gambling is either negative expectancy* with a bookie/casino or zero-sum. The zero-sum case is a bit more interesting: if you are better at betting then you can make a profit, but the people who succeed are not problem gamblers. There is probably some argument to be made that trading some financial instruments in certain ways is similar to this latter type of gambling. So my claim is basically that investing is an activity that should be positive sum and gambling is not. * if you are smarter than the casino or bookie you will be kicked out so maybe you can make a small positive amount of money.

imtringued 5y ago
Trading is an activity with supply and demand for trading. It's behaving like any old business. You're offering a product to a customer (the investors). The problem with this is obviously that consumer markets can be saturated. The number of investors does not grow with the number of traders. Adding more traders just results in a fight for market share. When traders are pretending that other traders are their customers they basically started a game of musical chairs where someone has to lose.
bko 5y ago
It's not just about the instrument because you can gamble with stocks, which in general have positive expectancy and positive sum. Day trading meme stocks is definitely gambling, so I would say it also has to do with behavior.
- cehrlich 5y ago
  I agree there is a big difference between day trading meme stocks and sticking your money in an MSCI World Index Fund or whatever. That being said, I still constantly feel tempted to check how my portfolio of very boring index funds is doing, despite having absolutely no intention of selling anything for many years.

Barrin92 5y ago

quite a lot of forms of investing are pretty much gambling but one key distinction is that investing has a market function, it's a price discovery mechanism. Investors who lose in a market still serve a purpose. even if individual investors might incur losses at the very least there are external benefits to their behaviour for everyone else. Without active investing allocation of capital does not work. gambling taking place in purely isolated environments has no such benefit.

whiskyant 5y ago

Picking successful long term investments is highly knowledge/conviction/skill based. Picking winners consistently is very doable for a good investor.

tejohnso 5y ago
But that just further muddies the distinction between gambling and investing if you contrast with poker. Poker is highly skill/knowledge based. Winning tournaments consistently is very doable for a good player. In both cases "consistently" doesn't mean without losing from time to time. Even Buffet makes mistakes. As does Negreanu.
zeckalpha 5y ago
A Random Walk Down Wallstreet illustrates it is luck. To claim it is skill is survivor bias.
- acdha 5y ago
  That’s not quite right: that book is about consistently, significantly outperforming the market. That doesn’t mean that you can’t invest and see consistent solid returns, unlike gambling, but sets a ceiling on how much you can sustainably expect.