July 05, 2005
Gambling and the Financial Markets.
Posted by Caroline Bradley

I'm wondering about the connections between gambling and investing (which has been a theme here over the last few weeks). In many ways I think lotteries are a lot like financial markets - the operator of the lottery plans to make a profit through offering investors the chance to make a profit. From the perspective of the operator it's a lot like a market in debt - the operator can fix what it will pay out. From the perspective of the "investor" it's like equity (not even) - there is a slight chance of a big return. But in a way it's better because you don't have to wait so long to find out how you did.

A few years ago Arthur Levitt described day traders (the sort of day traders who should really be investing in nice safe mutual funds) as gamblers - they weren't even speculators. So is this sort of gambling the same as  financial spread betting, or is it different in some meaningful way? Presumably day traders may affect market prices in ways that spread betters do not (particularly if they have to operate offshore). But day traders need more money to invest, which limits their numbers (except that they may avoid margin requirements for a while by remortgaging their home or borrowing on credit cards) so perhaps that limits the impact of gambling on the markets (particularly if we can really enforce margin rules in relation to daytraders).

Fundamental value investing is a bit like gambling on horse racing - studying the form may help, although future performance may not track past performance and there's always a possibility of insider trading or (worse) market manipulation (the horse (or rather the rider) may be nobbled).

I don't think I care much about the idea of regulating gambling as such. I tend to think that (some) people like to gamble and regulation is unlikely to stop that. I do care about the ways in which governmental policies encourage people to gamble in some ways rather than in others.  For example, perhaps lotteries (and increasing numbers of slot machines) affect people's views of the financial markets.

If I were still in the UK (and some will think I'm still there in spirit) I'd attribute all of this to class. Working class people gamble (here this would be "middle classes" gamble) and upper class people speculate.   But somehow this sort of thing doesn't translate well. Or it does and people don't want to admit it.

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