Is trading gambling?

Posted by By at 22 October, at 15 : 15 PM Print



TGRWEB_400x312CORESharesThis is a question I am asked on a regular basis, usually when people find out that I work with traders, poker players and problem gamblers, writes Shayne Duncan.

These questions are many and varied: “Isn’t that a conflict of interest? Aren’t you supporting gambling by working with poker players and traders while denouncing gambling when working with problem gamblers?”

My answer to these questions is quite long and complex, so the remainder of this article is essentially my explanation of how I separate trading and gambling to resolve any questions of conflict that may arise.

When we talk about trading and gambling, an element fundamental to both is risk. In fact, you can add investing and starting a business into this equation as well because both of these pursuits also involve risk and can potentially be viewed as gambling. The purpose of engaging in any of these activities is to minimise risk in order to produce a return.

The potential to generate a return is the other fundamental element of trading, investing, gambling and starting a business. Where trading, gambling, investing and starting a business significantly differ is the expected rate of return on investment. The actual rate of return is largely unknown, regardless of how much market research and planning is completed. The exception to this is gambling.

Gambling activities, like poker machines, lotteries and some casino games have a fixed rate of return. This is why gambling is such a great business to own, because the odds of winning are already known. If a casino wants to increase its profit all it has to do is increase turnover, which means… get more people gambling. The casino knows exactly how much money it makes for every $1 that is wagered, so the recipe for success is very simple.

This simple formula doesn’t apply to all forms of gambling. Some forms of gambling do not provide a fixed rate of return. Poker, blackjack, sports betting and track betting (races for horses, trots and dogs) are all examples of this. In fact, all of these activities involve a skill that can be learned, developed and mastered to the point that an individual can become a professional.

Turn on ESPN and you will see 18-24 year-old males (the largest problem gambling demographic and the demographic most attracted to ‘get rich quick’ schemes) dominating the World Series Poker tournaments. Hire the movie ‘21’ (starring Kevin Spacey) on DVD and you will see an account of university students playing blackjack and winning huge amounts of cash. There are also professional punters who make their living betting on horse races, sport and other things.

What these poker players, blackjack players and punters have done is turn gambling into a profession. They have done this by adopting a strategy to manage risk and maximise their potential return. They have invested a significant amount of time and money along the way as they practiced their skills to the point of developing a level of expertise. They are highly skilled when it comes to calculating the probabilities in their respective field and they are able to make decisions based on those probabilities and take decisive action without fear or favour.

This is where and how trading separates itself from gambling. In trading, just like poker and blackjack, there are two systems that need to be mastered; playing strategy and betting strategy. Traders know these as trading strategy and risk management. Poker also has the requirement of being able to manage your emotions, so you can bluff, and at the same time, read the emotions of others. Again, these are highly practiced and developed skills that take time, effort, coaching and guidance to acquire and master.

Essentially, there are two words that separate trading and gambling; hard work. Anyone can click ‘buy’ and ‘sell’ on a trading platform, just as anyone over 18 can push a button to play a poker machine (in fact, I could train a pigeon to peck the button to play a poker machine by giving it food each time)…

 

Excerpted from an article originally published in the Nov/Dec 2013 issue of Think & Grow Rich Inc. magazine. If you are a subscriber to Think & Grow Rich Inc. magazine, you will receive this article in your Nov/Dec 2013 issue of TGR. If you are not a subscriber, click here to subscribe.

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