What is the difference between gambling and investing? Is there a difference at all?
A question that is often asked, and one you may have wondered about yourself, is whether there is a difference between what is known as “gambling” and what is known as “investing”, and what that difference may be if it exists. Some people believe there is no difference at all in practical terms – just in the moral judgements that people make about both of them. Other people believe they are fundamentally different in a number of ways.
Why Does it Matter?
Why bother defining gambling and investing and trying to draw a distinction you may ask. Well, there are a number of reasons that the difference between gambling and investing is very important:
- It is important that governments and regulatory bodies are clear on what the terms mean, so that they can have a full understanding of the scope and limitations of their legislation and regulations.
- It is important that people realise just how easy the internet makes it to gamble while under the guise of investing. When people use terms such as “gambling” or “investing” without really examining their meanings, those meanings can gradually change and create ambiguity and uncertainty. There are a lot of people who currently believe that they are investing, when what they are doing is better termed gambling. This is not to say that gambling is wrong or bad or should be avoided, but it does carry with it certain consequences in terms of the odds of winning, and the possibility of developing an addiction.
- Investing addiction, though rarely addresses, is as serious as gambling addiction, and should be treated as such. If more people start to view buying and selling stocks online as simply another way to get that “rush” of adrenalin or whatever else it is that drives the gambling addicts, then more attention could be directed at investing addiction and people who need help could get it. Maintaining a false distinction that investing is wise and sensible and gambling is irresponsible simply serves to hide many cases of “problem investing” or investing addiction.
- There are some people with ethical or perhaps religious objections to gambling. It is important that these people truly understand what gambling is and what it is not – it is highly likely that they are condemning some behaviour that really should not be considered gambling, while endorsing some other behaviour which really should be considered gambling.
How will this help me win while playing online pokies or other games?
As with some of our other frequently asked questions pages, it is not immediately clear how this will help you to increase your winnings when playing your preferred game. However, we at Online Pokies Australia firmly believe that in order to be a successful gambler, and to make money while gambling, you need to have a very clear idea of the various principles involved. In fact, you might find out at the end of this analysis, that you are actually more of an investor than a gambler – or perhaps the other way around. Insight into your gambling or investing style, will greatly assist you in determining whether you need to change it, or develop it to make gambling or investing more successful, more lucrative, and less risky.
First, let us look at what the dictionaries say about each of them. In fact, we encourage you to go and do some research into different definitions of gambling and investing for yourself, and see what you come up with. Here are some definitions that we found:
Random House dictionary defines each as follows:
Gamble: To play at any game of chance for stakes. To stake is to 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.
The online dictionary, Dictionary.com, defines the terms like this:
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.
On initial examination, both of these sets of definitions appear reasonable. However, if you really look at the carefully and think about them, you realise that they are not particularly helpful. The distinction is not clear. The definitions for gambling could apply to investing and the definition for investing could easily apply to gambling. Could gambling not be understood to mean committing money or capital in order to gain a financial return? Or understood to mean putting money to use by purchasing something offering profitable returns? And what about investing? It could easily be understood to mean betting on an uncertain outcome, taking a risk in the hope of gaining an advantage or benefit, or to risk money on the outcome of something involving chance?
We begin to see why many people feel there is no real difference between gambling and investing. Benjamin Graham was an American economist and a professional investor. He defined an investment as a security purchase which promises safety of principal and a reasonable return. He claimed that any purchase which does not meet this test should be regarded as a speculation – or a gamble. Let us examine his definition a little more closely. It has two distinct parts.
First: The money you invest should suffer little loss, even if the company you invested in does not do well after your purchase.
His definition has two requirements: (1) the money you invest should suffer little loss even if the company fares poorly after purchase and (2) the investment return must be reasonable. However, this definition, while it may be good in theory, does not help very much either. We have all witnessed if not personally experienced in recent years, massive losses in the stock market. People made investments, which, although reasonable, suffered huge losses when their chosen companies lost value or even went bankrupt after the investment was made. It is unlikely that Benjamin Graham would have said, when examining the initial investments, that they constituted speculation or gambles, rather than legitimate investments. The difference between gambling and investing therefore, cannot rest on the outcome of the investment/gamble. It must exist somewhere in the act itself, or the motivation for the act.
Thus it seems that definitions do not help us much in our search for the distinction between gambling and investing. Let us turn then to the examination of some of the ways that investing and gambling are perceived by society to be different, and see if this provides some illumination.
Gambling/Investing distinction perception number1: Investing is a good thing, gambling is a bad thing.
This is about the most fundamental of the distinction perceptions, and it is hard to argue with its existence. Investing is widely regarded as a positive thing, and a key factor in driving the capitalist engine. Investing tends to put money into the hands of those who have promising and productive uses for it. This investment → return → reinvestment cycle of successful investment gradually increases and improves the economy, driving it upwards. Investors are essentially betting on which companies they think will succeed. However, they are not doing only this. Investors, when they bet on the company they think will succeed by buying shares in that company, they are also providing the capital that those companies need if they are to succeed. Investments by venture capital firms, “angel investors” and technopihilic individual investors have played a crucial role in the establishment of the United States as an economic world leader. Also, you can choose which companies to invest in based not only upon your view of their chances of success, but also upon the kind of work that they do. In this way you can support causes you believe in, and even change the world in small, and sometimes in very large and significant ways. Companies with socially conscious policies, companies which produce and market environmentally friendly alternative energy sources, biotech companies working to cure diseases, even companies which produce or sell something ordinary but have exceptional treatment of employees, or offer benefits like paid maternity leave – you can show your support for these companies, and these ideas and principles by investing in these types of companies.
By way of comparison, it is not so clear that gambling is making a similar positive contribution. However, one can still make an argument for gambling constituting a positive contribution to the economy and therefore to society. Gambling tends to help local and state governments. Regarding the financial market, one can also make the case that people who gamble serve a positive function by adding to the depth, liquidity, efficiency and transparency of the market in which they are gambling.
There is also a good deal of moralising regarding the question of gambling and how it may or may not be distinguished from investing. There is also a great deal of contradiction. Governments tend to disapprove of gambling, and to focus on the effects of problem gambling. Problem gambling of course is a major problem for society and can be devastating for families – and it deserves attention from society and from government. However, state governments in Australia profit hugely from gambling-related income. Taxes on gambling winnings, state lotteries, and taxes due on pokies and similar games in pubs and casinos bring in massive revenue for state governments. For these same governments to then criticise gamblers, and to speak about the morality (or lack of) about gambling while bringing in millions of dollars from it is viewed by many as extreme hypocrisy and not deserving of credibility.
Many religions also frown on gambling, though there is hypocrisy here as well – Church bingo being an obvious example. Further, the hold that religions have over our daily lives and behaviour is lessening every year in modern Western societies like Australia. Religions prescribe and forbid many acts and behaviours that do not match with our contemporary morality.
It should also be noted that investing is not necessarily productive. A great deal of trading in stocks and shares consists of buying and selling quickly, almost immediately. This results in no net contribution, no benefit for the wider economy as a whole, as the positive contribution discussed above only results from buying and holding – buying stock or shares and keeping them for some time before selling them on.
Gambling/Investing distinction perception number 2: When you are investing, the odds are in your favour. When you are gambling, the odds are against you.
This is another fundamental distinction in people’s perceptions of investing and gambling. Wall Street investor Peter Lynch has argued that, “An investment is simply a gamble in which you have managed to tilt the odds in your favour”. Is this true? This position, and the above perception, contains two assumptions:
First: when gambling, the odds are against you.
Secondly: when investing, the odds are in your favour.
This position is overly simplistic, and doubly so. There are numerous instances of investments in which the odds are stacked against you. These include but are not limited to futures, options, and commodities trading (here you can get hurt on the commissions and the bid/ask spread), frequent stock trading, and selling short (the market always goes up rather than down in the long run). It is absolutely untrue that when investing, the odds are always in your favour.
Similarly, there are instances of gambling in which the odds are in your favour. While overall it is true that when gambling, the chances are that you are not going to win because the odds are against you – this is not universal or inevitable, and there are steps you can take to increase your chances. For instance, poker players rely on skill rather than mere chance when they gamble on poker, and at a professional level, some players make a great deal of money because they predictably have excellent odds of winning. This is quite a difficult task to achieve and a difficult skill set to master. There are easier ways of gambling and tipping the odds in your favour. The easiest and best known of these is playing blackjack and card counting. By counting cards when playing blackjack in casinos, you are able to obtain a small but predictable and reliable advantage over the house of 1.5%. This may seem a small advantage, but if you utilise it over a long period of time, it can be lucrative. Naturally, you need to become skilled at card counting in order to be successful, but this is not as difficult as you may suspect. Check our Frequently Asked Questions What is Card Counting? To find out how you can obtain this advantage for yourself.
There are additional problems with this overly simplistic analysis of investing as a winning bet and gambling as a losing one. First, it implies that there is a line, a clear demarcation, between gambling and investing that is crossed as soon as the odds step over the “break even point”. Consider a situation in which two people are participating an an activity – a contest of some sort – in which one has an advantage over the other. The above characterisation would mean that one is investing while one is gambling. This would leave the transaction itself impossible to identify as either an investment or a gamble. Lastly, while odds for most casino games are possible to calculate, the same cannot be said of most stock market transactions. It is often impossible to determine in these transactions whether the odds are for you or against you.
Gambling/Investing distinction perception number 3: Investors are averse to risk, while gamblers are actively seek it out.
In fact, the element of risk is fundamental to both investing and gambling. There are less risky investments, such as blue chip stocks or government bonds, but even these carry some risk, such as that related to inflation. This perception seems more related to the willingness of the gambler or the investor to accept risk, and the level of risk that they will accept. Generally, as a rule of thumb, investors take sensible risks while gamblers do not, and if investors do take risks, they expect a high chance of being compensated for that risk. Paying a hundred dollars for a one in ten thousand chance to win a thousand dollars is a risk that not very many investors would take – at least not many sensible investors. Yet many gamblers take such a risk, or even worse ones, on a regular basis. That said, investing in extremely volatile stocks with a high chance of bankruptcy would certainly seem, by this standard anyway, to constitute a very high risk and thus be considered gambling rather than investing.
The same can be said of many professional gamblers. These people, unlike those who visit Star City or Crown casino for a night of boozing it up and throwing some dice, have often managed to tip the odds in their favour and therefore can be said to be acting more like investors than gamblers – refusing to take risks unless they have a reasonable chance of being compensated for that risk.
In fact, considering that while the odds for any given gambling activity can generally be very precisely calculated, and the odds for investing in stocks cannot be estimated to the same degree, it could be argued that professional gamblers are behaving more responsibly and sensibly (therefore, more like investors, according to this perception) than many or even most investors.
Gambling/Investing distinction perception number 4: Investing is based on skill and requires the intelligent use of a system, while gambling is based on luck and emotions.
Like most of these perceptions, this may be true some or most of the time, but there are too many exceptions to rely on it as a wholly truthful distinction.
Many, in fact probably too many, investors do not do nearly as much research as they should. Rumours and tips motivate far too many investments, which are all too frequently not backed up by legitimate or quality research. There are also a great many investors who act according to emotions, such as fear or greed or love of a particular company despite the evidence of their financial status, or who act without a strategy or while ignoring the strategy they do have.
Similarly, there are a large number of gamblers, though they may be a minority, who undertake serious and exhaustive research, often spending considerable money to obtain good information on what the odds are for particular games. Professional sports investors, despite their name, are generally considered gambling but often spend hours and hours every day handicapping various sports, relying on research fro newspaspers, line services, inside contacts and years of experience. These gamblers are often making big money thanks to their exhaustive research. They do not rely on their emotions, but rather keep a clear distance from them while betting on sports – they may have favourite teams but will not bet for them if the odds are not in their favour.
Gambling/Investing distinction perception number 5:Investing is business, gambling is entertainment
This distinction certainly used to hold up in the past – investing was strictly business and gambling was strictly entertainment. But is this true in today’s society? Business and economics author Brad Hill expressed this shift very nicely, explaining that investing has very much become a form of entertainment: “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.”
The internet has made gambling much more easy and accessible, but it has also done the exact same thing for investments and stock trading. This has meant a revolution for online brokerages and other kinds of financial web sites offering retail investing. This in turn represents a huge benefit for the individual investors and the economy as a whole, but it also represents a shift in the kind of people who are investing. While traditional investors are still trading, a new kind of investor has appeared on the scene, particularly the online scene. This new type of investor enjoys betting and sees online trading as a sort of entertainment. Often these new investors are attracted to investments such as these because while gambling is strictly regulated, investing is not, and the odds are generally better than in regular gambling.
Gambling/Investing distinction perception number 6: Gambling is addictive and destructive, and investing is not.
It is true that some gamblers do gamble compulsively and problematically. There is a great deal of research into the detrimental effects of problem gambling, and there are numerous services available for gamblers who find themselves gambling irresponsibly or compulsively, gambling money they cannot afford to lose or gambling for reasons that are deemed unhealthy and dangerous. Check our pages regarding problem gambling if you are worried you have a gambling problem and would like to know where to get help for your addiction.
It is not generally believed that similar problems exist in investment. There are no organisations like “Investors Anonymous”, no help lines and no manuals designed to assist those who are feel that they are investing compulsively. The lack of recognition of a problem like this, and the absence of an infrastructure to deal with it however, does not mean that no such problem exists. Marvin Steinberg is the executive director of the Connecticut Council on Compulsive Gambling. He stated quite recently, “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.'” However many online investors are checking their portfolios a number of times a day, and while they usually claim to be “buy and hold” investors, they often are in fact more of the “buy and sell” type of investor than they realise. This compulsive checking of portfolios, buying and selling can be financially draining and also can exhibit the same kind of emotional compulsions that problem gamblers exhibit. Overly aggressive investment is virtually identical to problem gambling in terms of the motivations and compulsions that drive it, as well as in terms of the possibility for financial loss. If you believe you are investing compulsively, we recommend that you answer the questions on our page “What are the signs of problem gambling?” and simply substitute “investing” for “gambling” on all the questions. If the results seem to suggest that you have a problem we recommend that you contact one of the organisations set up to help problem gamblers, and explain your situation to them. Given the similarities between problem gambling and problem investing, their advice and assistance are likely to be very helpful to you.
Gambling/Investing distinction perception number 7: Investing is saving for specific goals in the future, such as retirement, while gambling is not
As with all of these perceptions regarding the distinction between gambling and investing, this one is generally considered to be true, and on first reading it, you probably agree. In fact, it does tend to be true most of the time. However, this is mostly because it is very closely related to the perceived distinction discussed above that when investing, the odds are in your favour, while with gambling they are against you. And for those instances in which this is true, which is admittedly much of the time, it can also be said that investing is saving for the future while gambling is not. However, for those instances in which gambling odds are in your favour, such as blackjack while card counting or playing poker at a high and skilful level, gambling can be just as useful for saving as investing can.
Gambling/Investing distinction perception number 8: Investing is a continuous process; gambling is an immediate event.
This perception does seem to be true most of the time. Gambling is generally an act or a series of acts in quick or immediate succession over a distinct and generally short period of time. Also, it is geared towards immediate gratification, not long term gradual gain. Investing on the other hand, is an ongoing if not continuous outlay of capital toward the goal of continuous and often gradual increase of net worth. As we have seen with all of these perceptions, however, while they may be generally true, there are exceptions. And as with most of the exceptions so far, they can be found in the form of less traditional investments, and professional gambling. Day trading, that is buying stock and immediately selling it – usually in a matter of minutes – when the price fluctuates. Professional gamblers do not gamble for the wins or losses of one particular evening, but rather look at the bigger picture, and aim for gains in the longer term.
Gambling/Investing distinction perception number 9: An investment is the ownership of something tangible; gambling is not.
The second part of this statement is always true. The first part if only true sometimes. Certainly the general perception if that an investment constitutes shares in a company, which represents a part of that company. If you own 1% of the shares of a company, you own 1% of that company. However, not all investments are this simple or clear. Investments such as derivatives for example, does not represent the ownership of anything tangible.
Rather, derivatives are, as their name suggests, merely “derived” from other investments. For example, an option is a derivative investment that gives the owner the right to buy or sell a particular amount of a particular security at a specified price during a specified period of time. Essentially, the investment in an option is a bet that the price of a certain security will be above or below a certain price at a certain time. This certainly does not represent anything tangible, and when described like this, seems quite a lot like gambling, and less like investing.
So, where does this leave us? While at the beginning of this attempt to outline the difference between gambling and investing, it seemed that they were world apart, now the issue is a good deal more confused. Through looking at all of the above perceptions, and the exceptions that exist to every one of them, it is clear that there is a quite a large grey area between them, and that there is a large overlap zone as well. It is not just the activity itself that is important in attempting to establish different definitions, but the motivations of the gambler of investor, and the manner in which the activity is undertaken.
Another very important pattern that was identified throughout examining the perceived distinctions and the exceptions to them was the behaviour of “investors” behaving in a manner not very investor-like, and the behaviour of “gamblers” who were not behaving in a very gambler-like manner. We suggest that rather than distinguishing gamblers from investors, it is more accurate to view four categories rather than two: recreational gamblers, professional gamblers, recreational investors and professional investors. When we divide people like this, we can see that in fact there are far more similarities between professional investors and professional gamblers, and between recreational investors and recreational gamblers, than exist between these groups within the categories of “investor” or “gambler”.
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.
And so can we derive from all of this more accurate definitions of investing and gambling? Well, we can try. However, as the many exceptions outlined above prove, the distinction between gambling and investing is not nearly as clear as you may have thought:
An activity in which money is put at risk for the purpose of making a profit, and which is characterised by some or most of the following: sufficient research being conducted into the investment options; the odds being favourable; the behaviour being not overly risky; a systematic approach being taken; emotions, particularly greed or fear not informing the behaviour; 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.
An activity in which money is put at risk for the purpose of making a profit, and which is characterised by some or most of the following: little or no research being conducted into the options; the odds being unfavourable; the behaviour is overly risky; an unsystematic approach is being taken; the activity is informed by emotions, particularly greed or fear; 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; negative net economic effect results.
From these definitions, it is clear that our exceptions to the perceptions switch categories: professional gamblers are undertaking activities that are defined as investment, while recreational investors are undertaking activities that are defined as gambling. Which one are you?