What is the Difference Between Gambling and Investing?


"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges."

- John Maynard Keynes

What is the difference between gambling and investing? In order to differentiate between the two, we should start by defining them. Comparisons are often made between the two activities, but I've never seen the terms explicitly defined. If you're sufficiently motivated, I encourage you to try to define the terms 'gambling' and 'investing' before you continue reading this essay... you may surprise yourself. (Go ahead, I'll wait here for you.)

What definitions did you come up with? Are investing and gambling mutually exclusive, or is there an area of overlap? And are the boundaries clearly delineated, or is there a gray area in the middle?

Let's see what the dictionary says. Here's what the Random House dictionary on my bookshelf says:

  • Gamble: "To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance."
  • Invest: "To put money to use, by purchase or expenditure, in something offering profitable returns."

Both seem reasonable upon cursory review, but a closer look reveals that they're not terribly helpful. The definition for gambling could apply just as well to investing, and vice-versa.

The web site says:

  • Gamble: "To bet on an uncertain outcome, as of a contest. To take a risk in the hope of gaining an advantage or a benefit."
  • Invest: "To commit money or capital in order to gain a financial return."

Again, the distinction isn't clear. In investing, are you not betting on an uncertain outcome? Are you not taking a risk in the hope of gaining an advantage or benefit? In gambling, are you not committing money? Are you not doing it in order to gain a financial return?

Beyond the Dictionary

OK, so the dictionary definitions aren't very useful. Perhaps if we examine some of the ways in which gambling and investing are generally perceived to differ, we might be able to build definitions from those characteristics.

Investing is a good thing, gambling is a bad thing.

I think it would be hard to argue with the claim that investing is, on the balance, a good thing. Investing is widely regarded as the engine that drives capitalism. It tends to put money in the hands of those with the most promising and productive uses for it, and drives the economy gradually upward. Investors aren't merely betting on which companies will succeed, they're providing the capital those companies need to accomplish their goals. The U.S.'s leadership position in technology is largely due to investments by venture capital firms, angel investors and technophilic individual investors. Similarly, you can change the world in a small way by investing in companies you believe in, such as socially or environmentally conscious firms and mutual funds, or biotech companies that are working on diseases that might affect you or someone close to you.

Gambling, on the other hand, is not so clearly making a positive contribution. Gambling does tend to help local economies, but also usually brings with it well-documented unpleasant side effects. I'll leave it up to the reader to decide whether gambling is, on the balance, a plus or a minus. Looking to the financial markets, one could make the case that people who gamble in this realm do serve a function, by adding to the market's depth, liquidity, transparency, and efficiency. But that's of relatively minor value, and those gamblers probably capture most of that value for themselves. On the other hand, they often increase the volatility of the markets, which is on the balance usually a negative (although it does afford savvy investors opportunities for larger profits). As Warren Buffett has said,

"Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated, prosocial activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise: Short-term transactions frequently act as an invisible foot, kicking society in the shins."

The questions of whether gambling is morally wrong and how strictly it should be regulated are important but are well beyond the scope of this essay, and so I'll mention them only in passing. Governments generally frown on gambling (unless, of course, they're getting the lion's share of the profits, such as with state lotteries). Many religions frown on gambling (but they don't seem to mind church bingo). I have no problem with a person being morally opposed to gambling, as long as that person knows exactly what he/she means by 'gambling'.

I should hasten to add that not all types of investing are productive. Buying and holding results in a positive contribution to the economy, but buying and selling quickly, the way day traders do, results in no net contribution. For the purposes of the current investigation, we could either reclassify investing-type activities that aren't productive as gambling, or we could consider these to be exceptions to the rule. I lean toward the latter interpretation.

In investing, the odds are in your favor; in gambling, the odds are against you.

Peter Lynch has said that

"An investment is simply a gamble in which you've managed to tilt the odds in your favor."

But that position is too simplistic. There are plenty of investments where the odds are against you: futures, options, and commodities trading (where you get hurt on commissions and the bid/ask spread), frequent stock trading (for the same reason), and selling short (since the market goes up rather than down in the long run), to name just a few examples. Similarly, while for most types of gambling the odds are against you, it is possible for the odds to be in your favor. I spent one summer during college working in Arizona, and I drove up to Nevada most weekends to play blackjack. By counting cards, I was able to obtain a small but predictable advantage over the house, about 1.5% per betting unit on average. (I haven't returned since then, for several reasons: it's not intellectually challenging; while card counting is not illegal, Vegas casinos can make you leave if they suspect you of doing it; and I've found it easier and more enjoyable to make money in stocks than in blackjack.) Expert poker players can also make money at casinos, because their competition is other players rather than the house, and as long as the house takes its cut it doesn't care how the rest of the money is redistributed among the players.

There are additional problems with this attempted characterization of gambling as a losing bet and investing as a winning bet. It implies that a given activity switches from gambling to investing (or vice versa) as soon as the odds swing past the breakeven point. Similarly, if two players are participating in an activity in which one has an advantage over the other, it would mean that one person is gambling and the other is investing. That would imply that institutions which get in on IPOs at the offering price would be investors, and the little folks that those institutions immediately flip the shares to for a profit would be gamblers. Furthermore, while it's possible to calculate exact odds for some casino games, this is rarely the case on Wall Street. How can you know for sure whether the odds are for or against you if you decide to buy a particular stock today?

What about venture capital investments, you say? Aren't the odds stacked against them? Yes, the majority of venture capital investments result in loss, often a total loss of the amount invested. However, venture funds typically yield higher returns than stocks because a small percentage of the firm's investments are home runs, more than making up for complete losses on other investments. So while venture capital might seem like gambling in that the odds are against the VC firms on any given bet, on average the expected payoff is positive, so the odds in the long run are actually in their favor.

Gambling can be addictive and destructive, but investing can't.

Compulsive gambling has been correctly identified as a problem, and organizations like Gamblers Anonymous are helping people cope with the problem. No similar problem is generally thought to exist in investing. There is no Investors Anonymous, and no one talks about compulsive investors. But while there isn't yet widespread acknowledgement of investing addiction, there will be soon. Marvin Steinberg, executive director of the Connecticut Council on Compulsive Gambling, recently said this about investing addiction:

"We don't know the true extent of the problem because hardly anyone identifies it as a gambling problem -- they see it as a 'financial problem' or an 'investing problem.' "

Many online investors who claim to be buy-and-hold investors check their portfolios on a daily or hourly basis, and jump in and out of stocks more often than they realize. Active trading can be expensive, both in terms of the commissions and bid/ask spreads and in terms of emotional fatigue. Also, some people invest more aggressively than they should, which is virtually identical to gamblers who bet more money than they can afford to lose. This page provides a list of questions to help a person determine if he/she might be a compulsive gambler. Replace the word 'gambler' with 'investor' for each question and the questionnaire is equally useful, but for a different purpose.

Gambling is entertainment, investing is business.

As Brad Hill has said,

"Global financial markets represent the greatest spectator sport humanity has ever devised. It has planetary reach, a multitude of local competitive arenas, volumes of statistics, star players, and -- best of all -- anyone can move between the domains of observer and participant, fan and player. If you squint just right, the steadfast newscasters of CNBC appear to be play-by-play announcers, calling the game for U.S. fans. And do financial sections of newspapers differ from sports sections in their presentation of story, data, and personality? Not essentially."

While the 'gambling as entertainment, investing as business' dichotomy may have been clear in the past, the line is being blurred. The internet has enabled online brokerages and other financial web sites to revolutionize retail investing, which on the balance is a tremendous benefit to both individual investors and the economy in general. However, the widespread accessibility of cheap online trades has also attracted some people who enjoy betting and view online trading as a new form of entertainment. The major factors accelerating this trend are that gambling is strictly regulated and not ubiquitous, and that the odds are usually better in investing than in gambling.

Chris Anderson, executive director of the Illinois Council on Problem and Compulsive Gambling, has said that compulsive gambling isn't really about making money, it's about "action", and the lure of the big win. While I'm not a neuroscientist, I suspect that the chemical changes that occur in the brains of compulsive gamblers and compulsive day traders are similar, since they're both riding on the same emotional roller coaster of wins and losses. Similarly, while some people who invest in high-tech stocks do it for the potential returns, others do it because of the rush they get from the tremendous volatility. It feels right to classify the latter group as gamblers rather than investors.

I don't mean to imply that I think it's acceptable to gamble for entertainment but not to invest for entertainment. I think both are equally acceptable, provided the person enjoys the activity (as opposed to feeling a compulsion to participate) and provided the person uses only money he/she can afford to lose. But I'm probably not the best person to make a judgment on this question, because I've never found either gambling or investing to be entertaining... my goal has always been value creation rather than enjoyment, and I place bets only where the odds are most heavily in my favor, not where I expect to find the most excitement.

Investing is saving for specific goals, such as retirement, while gambling isn't.

Many people regard investing as a planned strategy of wealth-building for specific future goals. And this is certainly true of some types of investing. But this is largely a by-product of having the odds in one's favor. If you have the edge (whether in blackjack or in equities), time and the laws of probability are a powerful combination. Gambling would work just as well as investing for financial event planning if gambling games were in your favor.

Investors are risk-averse, while gamblers are risk-seekers.

Risk-taking is intrinsic to both gambling and investing. There are a few investments that don't entail risk, such as fixed annuities and government bonds held to maturity, but even those have inflation risk. The major difference between the two groups seems to be the participant's relative willingness to accept risk. Investors tend to avoid risk unless adequately compensated for taking it, but gamblers don't. To put it another way, investors take only the risks they should take, while gamblers also take some risks they shouldn't take. Would you rather have $50 or a 50/50 chance at $100? If you take the $50, you're an investor. If you go for all or nothing, you're a gambler. Would you rather put your money under your mattress or in an extremely volatile stock that could go bankrupt or could double in value? The question is slightly different, but the answer is equally instructive. If you expect to double your money quickly, whatever you're doing is probably gambling, even if it happens on Wall Street rather than in Las Vegas.

However, this characterization of gamblers as risk-takers applies only to non-professional gamblers, people who visit Atlantic City for a weekend for entertainment purposes. Professional gamblers who have managed to tip the odds in their favor behave more like investors, shying away from risk unless the reward is sufficient to justify taking the chance. In fact, one could make the argument that investors generally take on more risk than professional gamblers, because of the uncertainly inherent in the financial markets. As I mentioned before, it's difficult for investors to calculate how much of an advantage they have, but the odds of a given gambling strategy can be known either precisely or at least approximately.

Investing is a continuous process; gambling is an immediate event or series of events.

This rule does seem to hold in most cases. Investing is a continuous process of deployment of capital in search of continually increasing net worth. As a result, delayed gratification is implied. Gambling is a specific act or series of acts, centered around immediate gratification. In this respect, day trading resembles gambling: the participant gets in, the price moves up or down, and he/she gets out, usually in a matter of minutes. The same could be said of buying with the belief that a stock is about to jump, or buying IPO shares with the intention of flipping them in a few hours or days, or buying options which are close to expiration. On the other hand, buying in the belief that a stock's price will eventually reflect its value, with the plan of holding as long as it takes for this to happen, is more like investing.

Investing is the ownership of something tangible; gambling isn't.

The latter half of the statement is certainly true, but the former half is only sometimes true. Some investments involve the ownership of something tangible, but many don't. For example, derivatives are investments 'derived' from other investments. An option is a derivative that gives the owner the right to buy or sell a specific amount of a given security at a specified price during a specified period of time. Options are generally classified as investing rather than gambling, and rightly so, but they do not represent ownership of anything tangible. However, when you realize that an option is essentially a bet that a given security will or won't be above a certain price on or by a certain date, it starts to feel more like gambling than investing.

An even more strict definition of investing would require that it involves the purchase of an asset which either produces a stream of income or can be made to produce a stream of income. But this definition would eliminate such assets as collectibles, stamps, art, and gold, which have no intrinsic value. I don't think it makes sense to exclude them simply on this basis. We might choose not to consider them investments because of their poor long-term performance, but we shouldn't choose not to consider them investments simply because they won't ever produce a stream of income.

Investing is based on skill and requires the use of a system based on research, while gambling is based on luck and emotions.

A lot of so-called investors don't do nearly as much research as they should. Many buy on tips or rumors, or based on some analyst's price target, without doing their own exhaustive research. It feels right to call such behavior gambling. Similarly, investors who are making decisions based on emotions (especially greed and fear), rather than remaining emotionally detached and sticking with their strategy, are to some extent gambling.

On the other side of the coin, some gamblers do serious research, often paying hundreds of dollars a month for real time data on what the current lines are (for example, on or Professional sports investors devote 12 hours a day, every day, to handicapping sports. They read dozens of newspapers, subscribe to line services, maintain inside contacts, and have years of experience, usually on both sides of the betting counter. These professionals keep their emotions away from the decision-making process. Once they have a system that works for them, they don't second-guess it, focusing on long-term profits instead of day-to-day performance. Also, they concentrate on the areas in which they achieve maximum results. Many professionals bet only on one sport, which bears more than a superficial resemblance to Warren Buffett's idea of staying within one's "circle of competence".

While investing and gambling probably initially appear to be worlds apart, the above attempts at differentiation revealed that the actual differences are smaller than the perceived differences, and that there is a significant gray area in the middle. Based on the above characterizations, it is clear that the appropriate classification isn't wholly dependent on the activity, but also on the way in which the activity is conducted. There's a big difference between buying a stock after thoroughly researching it and buying a stock by hitting it on a dartboard. This is true even if the same stock happens to be chosen. Similarly, there's a big difference between buying exotic derivatives to hedge against an existing risk or position and buying the same derivatives because you saw a web site touting them. As a final example, there's a big difference between buying a government bond in order to collect the interest it earns and buying the same bond in the belief that interest rates are about to drop and the bond's value will skyrocket.

One interesting thing to note is the pattern of exceptions to the attempted characterizations. Most of the exceptions were people who were doing investing-related things but weren't behaving like investors, or people who were doing gambling-related things but weren't behaving like gamblers. Of the four groups, recreational investors, professional investors, recreational gamblers, professional gamblers, there are more similarities between the two recreational groups and between the two professional groups than between the two investing groups and between the two gambling groups. Specifically, those who use a rigorous system, do research, tilt the odds in their favor, treat it as a business rather than as entertainment, avoid addiction, and keep their emotions in check tend to behaving like investors, and those who don't tend to be behaving like gamblers. It might not be such a stretch to call professional gamblers 'investors' and recreational investors 'gamblers'.

A Third Option: Speculating

Another possibility is that the two terms 'gambling' and 'investing' aren't sufficient to cover the entire range of activities under consideration. A third term, 'speculating', is often used to straddle the two, specifically to handle activities that would ordinarily be considered investing but are done in a way that make them feel more like gambling.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes defined speculation as "the activity of forecasting the psychology of the market", and speculative motive as "the object of securing profit from knowing better than the market with the future will bring." Many people consider billionaire George Soros to be an investor, but he prefers the term speculator. In fact, he has said that "an investment is a speculation that has gone wrong." What he means by this is that, among speculators, an 'investment' is the name they give to a speculation that didn't work out the way they expected and that left them stuck with a position they hope will improve with time. Soros and other speculators make their predictions partially based on market psychology, and in this respect their behavior fits perfectly with the Keynes' definition of speculation. But there is much more to speculating than just interpreting market psychology, and this definition isn't sufficiently distinct from the ones we formulated for gambling and investing in the above section.

According to the dictionary on my bookshelf, speculation is "the engagement in business transactions involving considerable risk for the chance of large gains." By this definition, the entire distinction rests on the degree of risk and size of potential gains. In support of this definition, bond rating agencies commonly use the term "speculative" to refer to high-risk bonds (those rated below BBB by S&P or Baa by Moody's).

In their book Investments, Zvi Bodie, Alex Kane, and Alan Marcus argue that "a gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favorable risk-return trade-off." But this is too simplistic... no one would play casino games if the only possible outcomes were either breaking even or losing; the rush they experience comes from the possibility of winning and not merely from the taking of risk. They continue: "To turn a gamble into a speculative prospect requires an adequate risk premium for compensation to risk-averse investors for the risks that they bear. Hence risk aversion and speculation are not inconsistent." This part I agree with. In fact, whether they realize it or not, their definition reclassifies gambling as speculation when the odds can be sufficiently tipped in the player's favor, such as in professional blackjack or poker, which fits in nicely with argument made in the previous section.

Zvi Bodie et al appear to be saying that in order to be speculating rather than gambling, the person must not take greater risks than are justified by the potential reward. Others say that in order to be speculating rather than investing the person must be taking greater risks than are justified by the potential reward. For example, in Benjamin Graham and David Dodd's classic Security Analysis, they argue that "an investment operation is one which upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Both positions are defensible. But perhaps a better interpretation would rest on the realization that different investors have different tolerances for risk. Perhaps speculators are those who are risk-neutral, while gamblers are risk-seekers and investors are risk-averse. While adding the term 'speculation' to the mix might have some value, it probably adds more confusion than clarification, so I prefer to leave it out and focus on just 'gambling' and 'investing'.


So what's my resolution to this definition conundrum? Well, the purpose of words is to communicate concepts. So it doesn't really matter what definitions you use, as long as you and the person(s) you're communicating with are clear about what is meant by those words. And even more importantly, as long as you know what you're doing, investing or gambling, before you do it.

But with that said, it would be beneficial if everyone could agree on what the terms mean, so we don't need to make our definitions explicit every time we want to use them. To this end, I offer the following definitions, which are built from the various characterizations in the above section:


"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): sufficient research has been conducted; the odds are favorable; the behavior is risk-averse; a systematic approach is being taken; emotions such as greed and fear play no role; the activity is ongoing and done as part of a long-term plan; the activity is not motivated solely by entertainment or compulsion; ownership of something tangible is involved; a net positive economic effect results."


"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds are unfavorable; the behavior is risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results."

Speculating - I would prefer to avoid this term entirely, but if necessary I would define it as:

"Investing or gambling characterized by a high degree of risk and a high potential for reward."

Are you disappointed that I didn't crystallize the essence of gambling and investing into a single distinguishing feature? Did I merely sidestep the ambiguity, and sweep the gray areas and the important exceptions under the rug? I don't think so. The taxonomy doesn't have to be completely distinct in order to be useful, nor does it need to be just a single feature. And just because some of the characterizations had exceptions doesn't mean they should be thrown out entirely. Nearly everyone agrees that the concept of 'chair' is a useful one, even though it's difficult to define exactly what the necessary and sufficient characteristics of a chair are.

Why Does it Matter?

  • Lawmakers and regulatory bodies need to be clear on what the terms mean, so they understand the scope of their legislation and regulation, regarding prohibited behavior, adequate disclosure, participant protection and similar issues. In general, I'm in favor of less regulation and more disclosure for both activities described as gambling and those described as investing, but I'm no expert on the subject and a thorough discussion is beyond the scope of this essay.
  • Everyone needs to realize how easy the internet makes it to gamble under the guise of investing. When people use generic terms without ever specifying what they mean, it's easy for those terms to gradually change in meaning, and I think that's exactly what the internet is causing to happen. I don't mean to imply that the internet's democratization of investing is a bad thing. In fact, I think it's the one of the most important developments in the history of investing. My hope in pointing this out is to awaken those individuals who are acting like gamblers but who think they're acting like investors.
  • Investing addiction is as serious as gambling addiction, and should be treated as such. If more people start to view buying and selling stocks online as a way to get the betting rush that previously required a trip to a casino, is there any reason to think the same negative consequences that follow gambling won't also follow investing? Perhaps investing addiction is not getting the attention it deserves because most people are attaching to it all the positive connotations of investing and none of the negative connotations of gambling.
  • Those who have ethical problems or religious issues with gambling (or even investing) owe it to themselves to figure out exactly what they object to and why. As I mentioned, I have no such ethical problems with either gambling or investing, but again, this discussion is beyond the scope of this essay.

I'll leave it to Benjamin Graham to further emphasize why such clarity is essential. In The Intelligent Investor he said:

"The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against."

He continues:

"Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook . . . There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose."

I agree completely, and I suspect that his use of the term 'speculating' is very similar to this essay's use of the term 'gambling'.

Special Disclaimer

  1. This essay is not meant to condone gambling, or to suggest that you cash out your portfolio and become a professional blackjack or poker player. Those are tough ways to make money, and were mentioned primarily for illustrative purposes.
  2. We recommend that you get assistance from a professional before doing anything you don't know how to do.
  3. Some of these activities, especially those considered gambling, might not be legal in certain places. Even if you find bets for which the odds are in your favor, we encourage you to make sure your chosen activity is legal before participating.

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Thomas Murcko Tom Murcko

is an entrepreneur, connoisseur and raconteur. His company WebFinance Inc. websites focus on education and empowerment and collectively reach about four million people per month. He graduated magna cum laude from Dartmouth College and lives in Washington, D.C. His goal is to fill his life with happiness, pleasure and meaning, while helping others to do the same. Follow Tom on Google+.

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24 Responses to “What is the Difference Between Gambling and Investing?”

  1. Steve says:

    Great article. I would only add: in my opinion, as soon s the word ‘hope’ comes into play, it’s a gamble.

  2. speculator says:

    The difference between investors and Gamblers is that the investors are deluding themselves while the Gamblers are honest about what is involved.Any activity where you risk money is a Gamble. GFC is a good example. Do you have any control over the stock market , the currency markets or the commodity markets ? Isn’t there more certainty in Rafael Nadal winning the French open ? Gamblers predict possible scenarios and bet accordingly. Whatever financial activity I am involved in I call myself a Gambler

    • jagdish alva says:

      I fully agree with you that we are all gamblers of different magnitude.
      Everyone invest with a hope that they get higher return.The result is unknown so it is nothing but a gambling.

  3. KF says:

    I find your essay to be one of the most useful piece I have ever read. It is that profound! I feel that if you don’t know the difference between investing and gambling then whatever framework you come up with is flawed which cause flawed decisions causing flawed actions and consequently disastrous results. I can’t thank you enough for the opportunity to read and understand your article.


  4. James Switzer says:

    Great Article. I like to make the point “don’t put your money on the table if you don’t know the game” this holds true for both investing and gambling alike. Investing in a business or stock that you know nothing about is always a losing bet. Do your homework on the game you want to play or investment you want to make before you sit down to play.

  5. David Moran says:

    Very good post. Value investing can’t be considered gambling. After doing the due homework on a company one wants to buy stock out of, one is putting money to work. And if expectations don’t materialize then one gets out. It is like running a business. One does not know the outcome of one’s investment in the business until earnings are greater than expenses.

  6. R.jothi says:

    I have benefit for your message. I want more information for your website and more expensive for all details..

  7. olawale Odenike says:

    Investing and Gambling to novice, are the same. But looking at gambling, if a gambler makes by chance, millions from his activities, if not wise he may end up being a pauper because there is no consistency in making money from gambling. Conversely, in investing, once one can find one’s footing in making money consistently, in investing in Fx, stock etc. the money will continue to grow and like any other endeavours, occasional accidents may happen but one can still come back to track. In conclusion, to me, consistency differentiates the two.

    • Mike says:

      If anyone makes a million dollars in anything and if they are not wise they can lose it all.

      Even if that million was made in the stock market.

      You can make money consistently by gambling, look at the professional black jack player or sports gamblers or poker player etc.

  8. Rohan McLeod says:

    1/ I think it is established that investing and gambling are similar enough to consider using the
    theory of the latter on the former.

    2/ The theory of the latter suggests multiplying
    the odds by the gain to establish the ‘long term
    gain'(LTG) eg if the game is doubling ones
    money on the throw of a coin, LTG= 2x 1/2 = 1;
    so while it may be fun it would make more sense
    financially to keep one’s money safely ( ?)
    (Obviously even banks collapse occasionally)
    in the bank.

    3/ This brings up the question how large does
    LTG need to be and what other conditions need
    be satisfied to justify moving money from bank to the investment ?

    4/ If one treats all investment options as games of chance with some degree of risk
    (ie. bank-deposits,bonds,shares,gold ingots etc.);
    can a general criteria be developed which relates
    annual % return and LTG; in a way which allows
    a real ranking of such options ?

    • Rohan McLeod says:

      Gambling, Investment and Stochastic Profit MKII

      Consider a simple game of chance
      1/ Suppose in a sequence of ‘u’ wagers, that historically ‘s1′ were successful;
      let the fraction s1 /u = p1;
      2/ Let ‘p1′ denote the fraction of wins and (u- s1 )/ u = 1- p1 the fraction of losses.
      3/ Let ‘g’ denote the fixed ratio of return-on-wager to wager in each successful game;
      (non-success resulting in total loss of the wager).
      4/ Suppose there was a fixed wager of $w in each game,
      thus the total historically wagered was u.$w; let L1 equal the ratio of total returned
      to total wagered in the sequence of u games: the total returned = g. p1.u.$w
      thus L1 = (g.p1.u.$w) / u.$w = g.p1
      5/ Suppose on this basis we expect that in a future sequence of ‘u’ identical games:
      a fraction s2 /u = p2 will be successful; with p1 and p2 converging on some p as u increases
      without limit.; with L1 and L2 converging on some L; as u increases without limit.

      Then ‘L’ is a useful measure, in two different ways.
      1/ It provides a quantitative way of comparing games of chance
      eg for example the game of Two-U; where two coins are flipped and wagers concern whether
      two similar coin sides result or two dissimilar; p = 0.5, g = 2 thus L = 0.5×2 = 1;
      while for a lottery where $1 will return at most say $25 million and the game is to predict
      a sequence of six numbers between 1 and 50; p= 1/( = 8.74x 10^-11;
      and g= $25x 10^6 / $1 = 25 x 10^6 ;
      thus L = (8.74×10^-11) x 25×10^6 = 218.5×10^-5 = 2.18×10^-3;
      so one might decide on that basis; that after many games one will be better off playing
      Two-Up than buying tickets in the lottery!

      2/ It also provides a quantitative way of determining a games ‘long term’ profitability .
      Most games of chance produce no nett economic gain; that is they simply redistribute a
      prize pool consisting of the total wagers of all the game players at the time of each game;
      thus L for each player is necessarily =< 1; since this is the only equitable possibility.
      (a) Further totalizator race- horse betting and lotteries take a share of this prize pool prior to
      redistribution ensuring L <1; since they must on average return a profit as business ventures;
      one of the reasons they frown on the technique known as card-counting at the black-jack
      table is because for the card counter L > 1; which means L 1 for profit and > 1.036328 to be better than just keeping the ‘investment’
      safely in the bank earning 3%/year !
      Notice thus far we are treating a bank deposit as without risk for simplicity; but in reality there is a
      very small but still finite risk the bank could become insolvent and our deposit lost.

      A business model based on stochastic losses

      Insurance companies are able to use actuarial mathematics to calculate the frequency of ‘p’ say of
      policy holders breaking their leg in any year, based on statistics of previous years;
      so from the insurance companies point of view each year they play N game s of chance ,
      where N = number of insured legs; they calculate they will lose a total = p x N times;
      this will cost say p x N x g x $100 from a total of N x$100; ($100 policies).
      For the insurance company to make a profit on average ( in the long term) they require
      (g x p x N x $100)/ (N x $100) <<1; that is g x p = L <<1; suppose L = 1/10;
      thus if p = 1/1000 then g = L/p =1/10×1000 = 100 so with g = $payout/ $100 =< 100;
      then payout must be set to =< $100×100 = >1 unlike games of chance;
      because these are not zero-sum games, which simply redistributes some wager pool.

      1/ For simplicity consider some simple activity where ‘p’ and ‘g’ as above are fixed and
      g and u are very large. Thus returns = g.p.u.$w might be >>.u.$w; but this is not very useful,
      because most activities which produce stochastic profits do not have fixed or even known
      values of g and p at the time of involvement.

      A representative and very important example of this type of activity is ‘investment’ in patented inventions;
      but could be applied to venture capital investments generally;
      looked at historically we have these properties.
      (a) the ratio of total return to total expenditure ‘g’ and the probability ‘p’ of success;
      are not known at the time of investment and
      (b) where with the wisdom of hindsight we are able to determine ‘g’ for a large number of cases;
      it becomes apparent that this varies enormously; generally with a frequency roughly
      inversely proportional to ‘g’

      2/ So using the example of investment in patented inventions; how could a knowledge of the historical returns
      over lifetime of the base of patented inventions be used to approach ‘investment’
      in future inventions in a systematic way ?
      (a) Firstly we could calculate g = $ lifetime financial return / $ life time expenditure for each
      (b) Secondly we can determine an empirical curve which obviously includes the break-even
      frequency where g = 1; but in general describes the empirical relation:
      p = f(g); 0 = <p = <1; where 0 =< g =< gmax ;
      where p is the fraction of the total with a given value of g and
      'g' as mentioned is ($ lifetime financial return) / ($ life time expenditure for each device).
      (c) Now each point (g, p) on this curve might be thought of as a particular game; so we have an
      activity which is measured by many values of g and p; not just one, as in a simple game of
      (d) For each one of these pairs of values of g and p we can calculate L = p x g; the long term
      gain (see above)

      Can a business model be based on stochastic profits? (cont)

      2/ (e) Now returning briefly. to simple games of chance; if we pay 2 games 'blind';
      (That is we don't know which game we are playing; just that $w is wagered u/2 times in each
      game; then in game1 L1 = g1. p1 and in game2 L2 = g2..p2.).
      Then after 'u' wagers and many games; game1 will have returned L1.u/2.$w per game on
      average and game2 L2.u/2.$w per game on average.
      So the final return expected on average = L1.u/2.$w + L2.u/2.$w = u/2.$w. ( L1 +L2);
      thus 'effective' L = u/2.$w ( L1 +L2)/ u.$w = ( L1 +L2)/ 2. on average

      (f) Thus in general if we play q games 'blind': L1 = g1 .p1.; L2 = g2 .p2.,,,etc Lq = gq.pq.
      then 'effective ' (as above) L = u/q.$w ( g1 .p1.+ g2 .p2.,+ etc …gq.pq )/ u.$w
      = (L1 +L2+…Lq) / q;
      (g) So if L= g. p is now calculated for each point (g, p) then the area under the resulting curve ;
      from 0 to gmax divided by gmax will be the long term effective gain 'L” of the activity .
      (h) As with simple games of chance this L will be a useful tool in two ways:
      – it will provide a quantitative means of comparing such activities
      – it will provide a quantitative measure of the likely long term gain (ie profitability) of such

      3/ By way of illustration of the application of the theory in 2/ above; consider the hypothetical
      empirical curves shown on page 4 and page 5.
      (a) It must be emphasised that these curves have no basis in fact and could only be calculated
      from a data-set collected with great difficulty in a disinterested, comprehensive sample of
      the historical profitability of patented inventions
      (b) Anecdotally it has been suggested that the break-even frequency for patented inventions
      may be as low as 1/600; but this has no basis in fact. Regardless in an attempt to constrain
      speculation the first curve is shown passing through the point (1,1/600)
      (c) The hypothetical empirical curves on page 4 represent:
      curve I : the relation p = f(g) for the general base of patents (say)
      curve II: the relation p = f(g) for some selected possibly more profitable subset of he
      general base of patents (say)
      curve II: the relation p = f(g) for some selected possibly still more profitable subset of the
      general base of patents (say);
      – in order to represent all the data on a large range of scales; a log p versus log g is used

      (d) Regarding the derived hypothetical empirical curves on page 5
      curve IV: represents the relation p = g x f( g) for the general base of patents (say)
      curve V: represents the relation p = g x f( g) for some selected possibly more profitable
      subset of the general base of patents (say)
      curve VI: represents the relation p = g x f( g) for some selected possibly still more
      profitable subset of the general base of patents (say);
      – in order to make clear that the effective 'L' is the average value of g x p;
      the relations p = g x f( g) are shown with linear scales on the axis.

      (e) The result of these calculations (illustrative only) is :
      for curve I above L = 7.5 x 10^ -3 ie L <> 1 thus whilst occasionally unprofitably is generally very profitable

  9. sportsbetting says:

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  10. C.Ozer says:

    If greed doesn’t play a role in investment (as ‘investment’ is defined according to capitalism here above), how come most of the (corporate) investment tools and means utilise leverage… and what makes abundant capital easily available for leverage? risk-free interest. Greedy borrowers (‘investors’) motivated by fear-free lenders (‘investors’). Imagine how the true definition of investment can be achieved in an economic environment without any leverage and/or interest…

    Investment and gambling don’t truly differ in terms of uncertainty, inheritance of risk, hope, vision, strategy, financial profit or loss, even though the odds of a successful financial investment are proven to be more favorable/identifiable compared to gambling, at least from time-frame perspective. Thus, one can easily conclude that an investment is no different than gambling in this regard, and s/he is right.

    Yet, there is a fundamental difference between the two in terms of process-effects (either intentional or unintentional). The very process of gambling utilises a selfish approach of risk-taking without any community value, solely initiated to generate added financial value for oneself. In this respect, capital changes hands without any constructive process. Investment is different though. It utilizes a direct or indirect constructive production process to generate added financial value both for the investor AND for the community. It enables good ideas (beneficial to humanity) to flourish. In this sense, a gambler can hardly be defined as an investor while many investors in today’s capitalist world (of mass consumption as a result of leverage and interest) can easily be defined as gamblers.

    In absence of leverage and interest, both investment and consumption shall demand higher standards, and higher standards will provide a better filter for good ideas, with positive effects on constructive production, and negative (yet ultimately desired) effects on illusional economic growth. Only then shall the true fundamental benefit(s) of investments over gambling become apparent.

    To address John Mayhard Keynes’ suggestion

    “We can’t cure the illness only by treating its symptoms.”

  11. Tom The Engineer says:

    Whilst learned and informative I believe Tom Murcko’s text does not provide a succinct definition for the term ‘gambling’. Without taking a moralistic, religious or ethical stand here I would like to offer the following definition:

    Gambling is the deliberate taking of economic or value risk in an activity to enable the possibility of future gain by the gambler, where that activity is without the possibility of increasing the total sum of universal economic benefit other than those benefits which arise directly from the act of participation in the activity.

    By way of explanation the basic idea in this definition is that gambling is a risky activity which has no chance of producing an overall societal economic benefit and so from that point of view is not economically productive. What complicates this simpler notion is that it can be rightly claimed that gambling can produce pleasure, the satisfaction of a compulsions and also employment each of which may correctly be viewed themselves as providing economic benefit. So to concede this point those benefits which arise directly in this way from participation in the activity are excluded from the definition.

  12. Tom the Engineer says:

    This theory assumes that there is no economic benefit accrued from the act of placing the wager. It can be argued that the pleasure (or relief of a compulsion) obtained in placing a wager is itself of economic value just as much as receiving a ticket to the opera is or bottle of champagne may be.

  13. Nick says:

    OK try this definition of gambling

    In gambling there is no economic consequence to the outcome until the money is placed. In investing there is a economic consequence (jobs, capital formation, dividends, a real business) to the outcome without the investment.


    • denis says:

      i think, there are the same,professional poker players pay taxes, feed their families and buy things, i don’t understand when people don’t not contributing to society , what about wall street the like Modolf and associates, Enron what good did that do to society. for the challenge is in extreme greed and self control that can be dangerous to both fields.

  14. ALB says:

    “Investing is a good thing, gambling is a bad thing: I think it would be hard to argue with the claim that investing is, on the balance, a good thing.”

    See what you did there? That’s called begging the question. The easiest way to reach your conclusion is to start there in the first place, right? Heck, you could dust your hands off and go home at this point. The mission is already accomplished. Of course, if you left the whole editorial at just this, it would look like you’re not really making any kind of argument. Which you’re not, because you already ended the argument with these sentences.

    “It tends to put money in the hands of those with the most promising and productive uses for it, and drives the economy gradually upward.”

    Begging the question again. DOES investing put money into the hands of people who use it productively? You would have to illustrate that point. Some people might not think so. For example, we only need to look a few years into the past to find a great many people who used money from investments in ways that were not promising, not productive, and drove the economy ever downward. You could argue, oh, well, that’s the exception, that’s not happening all the time. To which we would say, the rest of us never know when it’s happening until it finishes.

    And whereas stupid gambling can ruin the life and livelihood of, say, one person, or one family, or maybe even one business if the gambler in question is particularly dumb, bad investment can ruin the lives of millions of people, most of whom had nothing at all to do with the business being transacted. So I would say the assumption you’re making here is far from taken for granted. It only works if we assume that your initial conclusion (arrived at via nothing at all, really) is also true.

    “Investors aren’t merely betting on which companies will succeed, they’re providing the capital those companies need to accomplish their goals.”

    And gambling also provides funds to people. If you win, it provides them to you. If you lose, it provides them to the casino, or whoever else you’re placing a bet with. Either way, someone is going to end up putting that money to use. You only assume that a business or investment entity is a better and more responsible receiver of funds than a casino or less public gaming entity based on your own biases. I, for one, trust even the sleaziest sports bookie as much as I’d trust certain businesses, banks, hedge funds, etc. Which is to say, not very much at all.

    “The U.S.’s leadership position in technology is largely due to investments by venture capital firms, angel investors and technophilic individual investors.”

    Well if I went and made millions at blackjack or poker, as many do, I could turn that money around and design apps with it just as well, couldn’t I? And if I lose millions at blackjack and poker, the person who took my money could do the same. But you’ll notice now that we’re talking about results, not means. What is *fundamentally* different or “better” about investing over gambling?

    Forget what happens to the money you win or lose from either, because that’s a different story. Let’s just ask, is betting on a stock any different than betting on a football team, when you consider the act? That question isn’t even addressed here. If it was, we might conclude that investing is simply a less volatile form of betting, something that takes a little longer and has (slightly) less sharp ups and downs that allow for the illusion of greater stability on which you can build something like, say, a tech sector. The same way you can build a bigger house out of sturdy lumber rather than pressboard. But there’s no grade of lumber so high that it changes the definition of the act when you nail two boards together, is there?

    Besides, all of the analogies in this column seem rooted in another fundamental assumption: That when we’re talking about investment we’re always talking about the little guy, the individual buyer, analogous to the guy sitting at the blackjack table or putting money down on his team at the neighborhood bookie. But not all investors are the little guys. Some of them are the big wheels. Some of them are, to use the language of gambling, the House. You can’t forget the House when you talk about gambling. You argue that gambling is riskier than investing, but it’s only riskier for one side of the equation. And so with the markets as well.

    “Gambling does tend to help local economies, but also usually brings with it well-documented unpleasant side effects.”

    Oh, well! Thank God we don’t have any unpleasant side effects from the markets, am I right? Geez, what a world it would be when the livelihoods of millions of families ride on the furtive decisions of a few well-heeled people playing chicken with their retirement funds or their mortgage. Good thing that’s never happened.

    “Looking to the financial markets, one could make the case that people who gamble in this realm do serve a function, by adding to the market’s depth, liquidity, transparency, and efficiency.”

    So the difference is that you like markets. That’s the only distinction being drawn here. Investing is gambling that more people approve of. And so it has taken on a veneer of legitimacy that traditional betting lacks.

  15. Nick Siersema says:

    gambling = there is no risk as to the outcome of an event until the bet has been placed.

    investing is the opposite.

  16. Janet O'B says:

    I am a psychotherapist and recently sat with a couple devastated by the impact of poor investment decisions. What marks the distinction between investment and gambling is the presence of denial. The client was not able to stop when he was spiralling into debt in order to protect his investments and kept the information from his partner for many years. The consequences are remarkably similar to other addictions; trust broken, personal shame and embarrassment and the threatened loss of family.

  17. pop says:

    according JMKeynes perhaps no difference!

  18. Alex says:

    I think this is a VERY biased article.. you seem to know a lot more about investing than gambling. Maybe you should try gambling? Although with that mindset, you wouldn’t be very good at it.

  19. Tim Salmon says:

    Deciding on a bet of 0, 10, 100 or 1000 dollars on a horse will (or at least should not) not affect the performance of the horse one iota. Faster or slower. If it did, by for example, influencing the jockey it would be deemed illegal.
    Deciding on an investment of 0, 10, 100 or 1000 dollars in sisters flower shop however will most certainly have an effect on the performance of that shop and the eventual returns.
    This principle is known as reflexivity. Gambling is non-reflexive. Investment is reflexive. And even though it becomes strained around the margins (exactly how reflexive is a put option on a fixed/floating swap). I think it holds.

  20. nombuso says:

    before I read this in my mind they were totally different but now that u made me understand they are more or less the same

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