Is Trading the Same as Gambling?

This is a discussion on Is Trading the Same as Gambling? within the New to Trade2Win forums, part of the Reception category; SHORT ANSWER The very short answer . . . Maybe yes, maybe no; it very much depends on your definition ...

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Old Oct 31, 2010, 4:56pm   #1
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Is Trading the Same as Gambling?

SHORT ANSWER

The very short answer . . .
Maybe yes, maybe no; it very much depends on your definition of gambling and whether or not you have an 'edge'.

The official view
The definition of ‘gamble’ in the Oxford Dictionary of English (2nd edition, revised) is:
Verb [no obj.]
1. play games of chance for money; bet: he gambles on football.
[with obj.] bet (a sum of money): they gambled their money on cards.
2. take risky action in the hope of a desired result: he was gambling on the success of his satellite TV channel.
Noun [usu. in sing.]
1. an act of gambling.
2. a risky action undertaken with the hope of success: we decided to take a gamble and offer him a place on our staff.

Clearly, according to the dictionary, any kind of trading or speculation in the financial markets most definitely is gambling. No ifs, no buts. However, based on this broad definition, walking down a flight of stairs or crossing a road could also be thought of as gambling. In fact, one could argue that living is gambling, as a great deal of our daily lives involves taking some ‘risky action in the hope of a desired result’.

Two extremes
At one extreme, many people would not consider crossing a road as gambling. Most of us achieve the desired result – i.e. reaching the other side – safely, every time. However, it involves some risk and a few unfortunate souls have accidents, sometimes fatal ones. At the other extreme, most people would consider betting on the result of the 3.30pm at Chepstow as gambling, as the desired result of your horse winning the race can’t be achieved with any degree of certainty. So, this begs two questions. Firstly, where is the dividing line between ‘not gambling’ when crossing the road and ‘gambling’ when betting on the gee-gees? Secondly, and more importantly, which side of this dividing line does trading fall on and why? These questions - and more - will be addressed in the Long Answer . . .

Last edited by timsk; Nov 2, 2010 at 10:14am.
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Old Oct 31, 2010, 4:56pm   #2
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Re: Is Trading the Same as Gambling?

T2W Bot started this thread LONG ANSWER

Benchmarks
The Oxford Dictionary of English definition of ‘gamble’ does not reflect fully the common usage of the word, as most people would not consider themselves as gamblers every time they cross a road. They tend to use the word to distinguish between an activity that is pure chance and cannot be controlled, as opposed to one that involves varying degrees of skill. This is important because it’s the application of skill that will allow us to pigeon hole any activity into ‘100% gambling’, ‘100% not gambling’ or some grey area in between. The starting point is to define the two 100% extremes and set them as benchmarks against which all other activities can be judged.

100% gambling
Few people would disagree that playing the lottery is 100% gambling. The reason for this is that it’s a game of pure chance over which you have absolutely no control. There’s no skill set that you can acquire and apply to improve your odds of winning. Additionally, once the ticket is bought, it’s irreversible and there’s no action that you can take that will influence the outcome of the draw. With any one ticket, regardless of whether you’re Einstein or someone with learning difficulties, your chances of hitting the jackpot are exactly the same. It’s entirely down to lady luck.

100% not gambling
By definition, an activity that’s 100% not gambling is the exact opposite of the above, so the desired result is achieved by the application of an acquired skill and is something over which you have complete control. Chance plays no part at all. For example, if you run a bath, undress, and get in it, you will get wet. Guaranteed!

The grey areas
Clearly, trading lies somewhere between the two 100% extremes. It’s not 100% gambling because, unlike the lottery, you have the potential to acquire and apply skills that will increase the probability of success. (Additionally, you could take inappropriate action that will increase the probability of failure). However, the same could be said about horse racing although, as has been mentioned already, this falls firmly into the gambling category in the minds of most people. At the other extreme, we can’t say that trading is 100% not gambling as we don’t have complete control over the outcome of each and every trade. At the moment, trading resides in no man’s land between the two extremes, along with crossing the road and horse racing. What’s needed then, is a revised definition of gambling that distinguishes between all these ‘bets’ and irons out the apparent contradictions.

Gambling: a revised definition
1. Risk of loss
Gambling involves placing a bet on the outcome of a future event. It carries significant risk which could result in the loss of something of value, e.g. your money, your time or your health.
2. Irreversible and based on chance
The result of the bet relies exclusively on chance. Once a bet is made, it is irreversible and the outcome is completely out of your control.
3. Positive expectancy
No skill set may be acquired and applied that will result in a positive expectancy. Whilst short term gains may be made, repeated bets increase the probability of cumulative loss. This is because a positive expectancy is not possible in the medium to long term.

(NB: the concept of positive expectancy is central the remainder of this FAQ. If you’re unfamiliar with it, an explanation is provided in the Essentials Of First Steps Sticky under the section entitled: ‘FIVE TRADING PRECEPTS’)

The key difference between the dictionary definition and the revised definition is the third point about positive expectancy. (+PE or -PE from now on.) In other words, if you have a +PE, probability is on your side and you're very likely to make money in the medium to long term. Conversely, a -PE means that probability is against you and you're highly unlikely to make money in the medium to long term. Let’s see what happens when the revised definition is applied to the various ‘bets’ discussed so far. To be free of the gambling label, any activity must fail to meet points 2 and 3 of the definition. In other words, the activity must not rely exclusively on chance alone and there must be the potential for a +PE.

Test application #1: crossing a road
You may recall from the Short Answer that – based on the Oxford Dictionary of English definition - crossing the road could be considered as gambling. So, we’ll start with that and see if the revised definition produces a different conclusion to the famous dictionary.
Risk of loss
There is risk of loss if you get it wrong. Your health is at stake and, possibly, your life. On the basis of this criterion alone, crossing the road is gambling.
Irreversible and based on chance
Have you ever stepped down off the pavement into the road, only to change your mind and swiftly step back up onto the pavement? In which case, you reversed your ‘bet’, directly influencing the outcome.
Positive expectancy
You may or may not have been formally taught the ‘Green Cross Code’ as a child. Either way, you’ve acquired and applied a skill set that enables you to cross roads safely, time after time. You have every reason to think that you will be able to continue to do this in the future. You, like most people, have an extremely high +PE.
Conclusion
Based on the revised definition, crossing the road failed to meet two of the three criteria. Therefore, it is not considered to be gambling.

Test application #2: betting on horses
Risk of loss
Financially, the risk is big. Additionally, there’s the risk of addiction which, in turn, could lead to other risks including relationships breaking down, stress and debt etc.
Irreversible and based on chance
The majority of people will back a particular horse on a whim based on gut instinct. However, it is believed that there are some professionals who have acquired – or have access to – great skill and knowledge about the sport in general; and horses, jockeys and trainers in particular. For this elite group, the success or failure of their bets is not governed by chance alone.
Positive expectancy
Only a tiny minority of people who bet on the result of a horse race enjoy a +PE. The vast majority will lose money over the medium to long term, based on a very poor -PE.
Conclusion
All three criteria are ticked when applied to the majority of people betting on horse races, qualifying them as 100% gamblers. However, there are a handful of professionals who are not gamblers according to the revised definition. These people manage to make money consistently over time. That said, they will always be tarred with the gambling brush because the vast majority of people lose money and, not only that, many of them accept that what they’re doing is gambling.

Some interesting questions to ponder . . .
If the majority of people who bet on horse races fulfil the criteria for being 100% gamblers, where does this leave the likes of Ladbrokes and William Hill who take their bests? Same question applies to casinos such as Caesars Palace and the Mandalay Bay Resort in Las Vegas. These are four immensely successful businesses; are their owners and directors not gambling just as much as the punters who walk through their doors? Many people would say no because: 'the odds always favour the house.' In other words, they enjoy a +PE, while their customers suffer from a poor -PE.

Test application #3: business
One of the examples provided in the dictionary definition was: ‘he was gambling on the success of his satellite TV channel.’ This might surprise and disappoint some business men and women as they tend not to view themselves – or wish to be viewed by others - as gamblers. As Ambrose Bierce, the American critic and satirist observed: “The gambling known as business looks with austere disfavour upon the business known as gambling.”
Risk of loss
Nearly every business has to embrace all manner of risk on a daily basis. E.g. the risk of losing customers, risk posed by competitors and failing to meet deadlines – to name but a few.
Irreversible and based on chance
The success or failure of any business venture is not governed exclusively by chance. Most businesses have the ability to remain adaptable and respond to changing market conditions.
Positive expectancy
If a business is able to identify a gap in the market and fill it with a product or service at a fair price, of sufficient quality, and backed by reasonable customer service, then it may well have a +PE. Equally, many businesses are doomed to failure from day one because they haven’t researched the market sufficiently, they don’t have the necessary skills and they are undercapitalized etc. In other words, they suffer from a -PE.
Conclusion
It could be argued that the market place is a giant sieve designed to filter out poor business people that don’t have a +PE. Businesses in this category are unlikely to survive for very long and the few that do rely heavily on chance. By contrast, professional business people will not only have a +PE, they will factor into their business plan the various risks associated with their venture. A huge chasm separates the amateurs from the pros: the former are gamblers surviving on a wing and a prayer, while the latter tend to be risk averse who leave little – if anything – to chance. So, are business people gamblers or not? The answer is that it entirely depends on the individual business and the people who run it.

Test application #4: trading
Risk of loss
Potentially, all the issues that face lovers of the gee-gees apply to traders too.
Irreversible and based on chance
Just like business people, traders can adapt to changing market conditions, enabling them to cut losing trades quickly and lock in profits on winning trades. Consistent profitability is unlikely to be the product of chance. Theoretically it is possible, but mathematically it’s highly improbable in the medium to long term.
Positive expectancy
This is the key difference that separates the pros who know exactly what they’re doing from the many wannabes looking for a short cut to an easy life. The pros have a +PE and the rest don’t!
Conclusion
Professional traders who enjoy consistent profitability over the medium to long term are no different from professional business people who make money year in and year out from their business ventures.

So, the bottom line is . . .
The bottom line is that based on the current Oxford Dictionary of English definition - trading is gambling. This is because it involves risk and the outcome of any one trade cannot be known in advance. Clearly, risk is a key component of gambling and it’s right that it’s included in any definition of it. However, it is misleading to label any activity as gambling based on the risk criterion alone. On this basis, most activities in life could be considered as gambling, as they involve ‘risky action undertaken with the hope of success’. Take something close to most of our hearts: food. According to Dame Deirdre Hutton, Chair of the Food Standards Agency, there are around 500 deaths each year in the U.K., caused by pathogens such as E-coli O157, campylobacter and salmonella found in food. Clearly, eating is a risky business, yet few of us consider tucking into our evening meal as gambling.

The revised definition seeks to address this anomaly with the inclusion of positive expectancy. Any activity that involves risk, relies exclusively on chance and has a -PE, is gambling. Without doubt, this can – and does – apply to a lot of ‘shoot from the hip, hope for the best’ traders. They are every bit as much gamblers as the casino punter who bets on the roulette ball landing on an even number. Professional traders, on the other hand, studiously try to minimise their risks, leave little to chance and, critically, enjoy a +PE. Under the revised definition, traders in this category are not gamblers. Or, at the very least, they are no more gamblers than the owners and directors of Ladbrokes or Ceasars Palace.

Last edited by timsk; Nov 2, 2010 at 11:37am. Reason: Updating
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Old Oct 31, 2010, 4:57pm   #3
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Re: Is Trading the Same as Gambling?

T2W Bot started this thread USEFUL LINKS

If you find other threads, Articles or sites on your travels around the net that are relevant to this FAQ, please add a link to them in this thread, outlining what it is that you like about them. Thanks.

T2W THREADS
Gambler, Trader, Speculator or Investor
Difference between trading and gambling
Are we all just gambling?
How to prevent trading turning into gambling...
This topic is one that continuously exercises the minds of members and is discussed regularly on T2W and beyond. These threads are just a handful devoted to the subject - there are many more. To find them, simply do a search for 'gambling' in thread titles.

T2W ARTICLES
Is Trading Gambling? by Sam Seiden
Does The Bible Oppose Trading? by Bill Provenzano offers a religious perspective

EXTERNAL LINKS
The Wizard of Odds
A great site run by an academician who knows more about numbers, odds and gambling related info' than you can shake a stick at.
GA
The official site for Gamblers Anonymous
GamCare
Hopefully, no T2W members will end up needing the services of Gamblers Anonymous or GamCare. However, if you can't stop trading and you're losing money on a consistent basis rather than making it, then you may have a gambling problem. These organizations provide free support, information and advice.

Last edited by timsk; Apr 11, 2012 at 12:10pm. Reason: Updating
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Old Oct 31, 2010, 6:11pm   #4
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Re: Is Trading the Same as Gambling?

Good Posts, Tim.

Let me add my 2 cents and maybe a bit of controversy to spice things up!

One thing that business, horse racing, and trading have in common is that there are 2 classes of people, the "shoot from the hip, hope for the best" lot, and the experienced professional types who have put in the time and effort to be successful. The real difference between these 3 and the lottery is that one can go from a "shoot from the hip" class to the more professional class, whereas that's not possible in the lottery.
I can put business, horses, and trading together as non-gambling, however, in all 3 if you believe it to be gambling and you treat it as such, then it's gambling, no different from the lottery.

Peter
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Old Oct 31, 2010, 11:00pm   #5
 
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Re: Is Trading the Same as Gambling?

Nice post, but isn't gambling ALWAYS in favor of the house? And trading is all neutral, winning and losing is both 50% each?
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Old Nov 1, 2010, 1:02am   #6
 
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Re: Is Trading the Same as Gambling?

Quote:
Originally Posted by kitsumon View Post
Nice post, but isn't gambling ALWAYS in favor of the house? And trading is all neutral, winning and losing is both 50% each?
Winning and losing are not 50% each as spreads and commissions effectively count as the house's edge.
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Old Nov 1, 2010, 10:01am   #7
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Re: Is Trading the Same as Gambling?

Quote:
Originally Posted by kitsumon View Post
Nice post, but isn't gambling ALWAYS in favor of the house? And trading is all neutral, winning and losing is both 50% each?
Hi kitsumon,
Welcome to the site.
Essentially, a positive expectancy (+PE) and house edge are the same thing.
Tim.
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Old Nov 1, 2010, 1:54pm   #8
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Re: Is Trading the Same as Gambling?

Interesting thread Tim and a subject you clearly have thought a lot about. My view is that anything that can result in loss of money (in this context) is gambling. The fact that this is predetermined and that the loss may be limited and known in advance does not change this.

However, the bar is long and the extremes of each end that you have discussed show how different it can be depending on where you are on the bar. The complexity comes in when you have to factor in each individual's psychology. It is not just about discipline but more importantly about consistency of discipline in my view that will determine the long term success or otherwise.


Paul
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