Oct

10

The American Heritage Dictionary lists the following four options for the definition of the word gamble:

1. To bet on an uncertain outcome, as of a contest.
2. To play a game of chance for stakes.
3. To take a risk in the hope of gaining an advantage or a benefit.
4. To engage in reckless or hazardous behavior: You are gambling with your health by continuing to smoke.

Certainly, according to definitions 1 and 3, and depending on your semantic leaning definition 2, we, as market participants seem to fit the bill of "gambler." It is the fourth definition listed above, however, that is really at the heart of this matter. Somewhere along the line, many centuries before any of us were born, the word "gambler," came not only to define one who takes on risk, possibly involving money, but one who does so in a crazed, irresponsible and, yes, reckless way. The image conjured by the word is always one of an old bum, living on the streets, who having been disowned by his family, and happens across a large monetary note, heads straight to the local casino or race track to lose it all. A helpless loser. A man or woman who could never raise a family or provide for anyone, even themselves. Gambling is seen as a type of disease, not unlike obsessive compulsive disorder, or alcoholism. There are twelve step programs and group therapies available. ! However this has never been the denotation of the word, but rather the connotation.

"Gambling is a serious addiction that undermines the family, dashes dreams, and frays the fabric of society." Thus spoke Bill Frist after the passing of his Unlawful Internet Gambling Enforcement Act this October second. The bill was due to be blocked for lack of parliamentary time, so Frist sneaked it into a Homeland Security bill, the "Port Security Improvement Act," which was guaranteed to pass based on its content. But can gambling only be done in a casino, online or otherwise? I wonder just how many people in the US have had their dreams dashed by online poker playing? Could it be more than 90% of those who play? That is the exact amount of new businesses that fail within their first year, an event that also dashes quite a bit of dreams, not to mention capital. Shouldn't First, according to his own logic, move to illegalize new business? Why is it that no one considers entrepreneurs gamblers?

A term usually approved of by more in our profession is that of "Speculator," which has the following strange definition:

A person who is willing to take large risks and sacrifice the safety of principal in return for potentially large gains. Certain decisions regarding securities clearly characterize a speculator. For example, purchasing a very volatile stock in hopes of making a half a point in profit is speculation, but buying a U.S. Treasury bond to hold for retirement is an investment. It must be added, however, that there is a big gray area in which speculation and investment are difficult to differentiate. Also called punter."

I wonder how this writer would characterize one who held a stock until retirement, or one who day traded bonds? Regardless, a speculator seems to be more respected than a mere gambler. No where does the word "reckless" appear in this definition, and indeed we start to see the immergence of respectability here. Even more respect is given to the "investor.":

1. A person who puts (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
2. A person who purchases income-producing assets. An investor as opposed to a speculator usually considers safety of principal to be of primary importance. In addition, investors frequently purchase assets with the expectation of holding them for a longer period of time than speculators."

Here we have the penultimate description of the respectable way to wager. Now we are "putting money to use," "consider[ing] safety of principal to be of primary importance." The word "risk" is not mentioned even once, much less "chance," and certainly not "game." It is interesting to note that the Unlawful Internet Gambling Enforcement Act act had to have special langauge which permitted "any activity governed by the securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 for the purchase or sale of securities (as that term is defined in section 3(a)(10) of that Act)." It is also interesting to note the harsh 57% crash PartyGaming took on the London Stock Exchange after the US law was passed, a movement that was sure to reward many who were "gambling," and short the stock.

I just wondered what everyone else thought of these terms. Do they object to them? Do they feel offended when they are called as such? Do they prefer one over the other? My mind runs briskly to the top poker players in the world, how consistently they are at the top of the money lists, making hundreds of thousands of dollars each year. Any gambling book worth its salt informs the reader of how important it is to preserve capital, and of how much one must go out of their way to avoid gambler's ruin. It seems to me only logical to regard the top poker players as investors. In fact, maybe this is the crux. Could it be that one who takes chance and succeeds is an investor, while one who takes chance and fails is a gambler? Not unlike one who kills a household of people is regarded as a mass murderer, while one who kills the majority of the army of another nation is hailed as a conqueror?

Tom Ryan responds:

In the main, it seems to me that there are several distinct differences between gambling and speculating/investing, and this ties into the discussion on fractals and markets which has been dissected many times on the list before.

The first point is that diversification tends to help reduce risk in speculating but does little for you in gambling. Why? Because the pieces of paper we trade in the capital markets are actually legal claims on the economic engine of commerce, via either a rate of interest or a claim on future assets/profits/dividends. Provided that economic growth and health continues in the aggregate and nuclear winter is not coming, in the aggregate the value of these claims will rise over time, and therefore the more you diversify the higher the odds that you will participate in this rising tide. In gambling, playing more casinos, tracks, or playing different types of games does not increase your probability of success.

Secondly, in speculating/investing, one can usually reverse out of a position or decision…even though there is a cost to that, it is not 100%. In gambling you can't take a portion of your money back after the ball is in play on the wheel or the horses are on the back stretch. So in speculating there is far more potential to adapt to changing circumstances

Finally, increasing your significant time horizon helps reduce risk in speculating/investing but actually works against you in gambling as in the long run all gamblers go broke because of the combination of the odds and the vig that you pay to play. It has to be that way of course as the casinos have to take a net rake from the gambling public in the aggregate to have a business in the long run.

One of the issues with infinite variance is that it leads one to theologically consider that the game ending event could happen at any time, therefore the statements I made above about risk management would be false. However, one of the (many) problems with infinite variance in a social environment (capital market) is that it ignores the ability of people and groups of people, to learn, adjust, adapt, and evolve over time as circumstances change. For example, although we may not have the ability to avert a major disaster from a large asteroid hitting the earth today, we as a species are more aware of the danger today than 500 years ago, and 500 years from now maybe we will have the technology/capability to avert such a catastrophe. This adaptation and learning process is always ongoing in the markets due to competition. This is simply a long winded way of saying, markets are not snowflakes.

GM Nigel Davies Replies:

Perhaps one of the most interesting aspects of this question may be that those who object the most may be the ones who are most at risk. Life is inevitably a speculative game in which the line between calculated risk and gambling is often going to be quite blurred.

In any case it's better to know that you're playing a game. As a topical example I doubt that many people who take on large mortgages to buy property consider themselves to be 'speculators' (gamblers?) on property prices and interest rates, but that's exactly what they are.

Gibbons Burke responds:

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller.

A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat. The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design - for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market — real work always involves friction. Someone must pay the light bill. The marketplace does not kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

*A sub-category of the speculative gambler: Playing poker with a corrupt official can be an untrace-able means to curry favor by "losing" bribes in a game of "chance." The 'loss' is really a stake in a position where the "gambler" is really seeking a payoff in a much bigger game, and the poker game is his means to a speculative edge. An example of this is Rhett Butler in "Gone with the Wind", who played cards with his jailers in order to obtain special privileges. Mayor Royce in "The Wire" is another literary example, but this may have been modeled the real-life bribe-taking tactics of former Louisiana Governor Edwin Edwards (whose 'house' is now Oakdale Federal Penitentiary - the Feds kicked him out of the game for winning too much.)


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