Gambler’s Risk vs. Investor’s Risk
Gambler’s risk and the investor’s risk have the same definition although they are not the same:
A risk is a negative outcome with known or estimated possibility.
If the possibility is unknown then it’s an uncertainty.
As an investor or trader, we don’t want risks; we make money not by taking risks but by managing them which cannot be fully eliminated.
The distinction of a risk from uncertainty is very crucial to understand why some people choose to gamble and also, why the professional investors try to avoid the gambling.
But first, we have to understand the risk in gambling and the risk in investing.
The zero-sum game of gambling:
Warren Buffett once said:
“And I would distinguish between speculative and gambling. Gambling involves, in my view, the creation of a risk where no risk need be created.”
Creation of risk is not the main difference between gambling and investing:
The main difference is that gambling is an artificial zero sum game with a guarantee of at least one winner. But the winner can only gain if someone else loses.
The creation of a risk which hadn’t existed before is a side effect of the artificial zero sum game.
Investing, on the contrary, doesn’t require any looser. Everyone can be better off but investing also doesn’t offer any guarantee for a winner.
An example: Suppose, someone sells his stocks to an investor and then the stock price rises. In this case, the seller has only the loss of missed opportunity but maybe, he benefited more by selling stocks because he spent the money for a better alternative, i. g. he is married. So, after this transaction of the stock, everybody was better off.
The stock market is not isolated from outside world. The economy and the businesses of the companies are continuously feeding the investors and the market by pouring money.
Economy generates and transfers wealth but gambling only transfers the wealth without generating it.
The gambling industry is of course not isolated from the economy but it is not contributing to the economy but only leeching.
One can say gambling industry provides entertainment but the same can also be said for the drug industry.
And one can also ask what is the contribution of the investors to the economy? In a very short answer: increasing the efficiency of the economy by improving asset allocation (This could be a long blog post).
Therefore we can say:
A gamble is a zero sum game that is closed only to gamblers and artificially created by its players.
Why avoid the gambling but accept the risks in investing?
In investing, you can manage your risks with your portfolio strategy and also with your stock analysis methods. In gambling, usually, you have to accept the odds against you, unless you are a professional gambler.
Professional gamblers try to develop a mechanical strategy which exploits the weakness of the game and turns the odds to their favor. In short: they try to avoid gambling too but their aim is exploiting the game or/and other gamblers.
As an investor, you don’t want that luck plays the primary role in your success. You would prefer depending on your skills and hard work.
You can be rich if you invest. There are plenty examples and also already existing opportunities. Gambling is a certain way to ruin your life.
If you try to gamble in the stock market, for example by taking too much risk, then your assets will be transferred to someone who can more professionally manage them, not to a casino.
Why people do gamble?
They know that the odds are against them and gambling is irrational.
One can say they begin gambling to entertain themselves but then, they get addicted to it. True but this is not the whole picture.
Why don’t they choose other entertainment?
The answer is uncertainty, as I mentioned before:
An example: suppose a slot machine favors the casino so that the house keeps the 60% of all money at the end of the day. For one dollar, you can win 100 dollars but the chance that you win is 0,4/100 = 0.4%! The odds are against gambler. For every dollar he puts in the machine, his expected loss is 60%. But the probability 0.4% means that you will win 4 times for every 1000 gamble. If you play only one time then the probability of 0.4% has not too much meaning, it is rather uncertain! For example, if you play only 10 gambles, you can win 2 times – 20% or 0 times 0%. You need the big numbers to make probabilities meaningful. And this uncertainty feeds the novice gambler to entertain himself with gambling and become addicted to it.
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