How Online Gambling is Similar to Investing on the Financial Market
Casino gambling is similar to trading in the financial markets, though investors don’t like to admit it. Investing and online gambling both involve the calculation of risks and rewards. Both involve money allocation while speculating in a future outcome. Online casino players evaluate risk by knowing the odds of winning a specific bet versus the potential payout. Stock traders assess the growth potential of an asset, but also have to gauge the overall strength of the financial markets. Many traders downplay the similarities between gambling and investment. Certainly, the most successful investors are masters of their field, so their investments carry little risk over time. For the rest of us – gamblers and traders alike -- life is a gamble. That’s true whether you're playing the stock market, buying a house, proposing marriage, trading binary options, or placing a bet in an online casino. Some differences exist. Betting is entertainment, while investing is a business. Yet both require remarkably similar skill sets. And while bettors have to contend with a house edge, they never have to fear a recession.
How is Online Gambling is Similar to Investing?
New investors put huge stock in expert knowledge. Experienced traders know that brokers exploit that trust. Warren Buffett, considered by many as the most successful investor in history, once said:
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."
The lesson: watch out for so-called experts. Not everyone knows as much as they claim. Your goal should be to know enough to know when you're being scammed. Be skeptical. The truth is, online gambling has a lot of so-called experts who don't know what they're talking about. But stock trading has its share of shady tipsters, too. The stock market is complex. Evaluating a company's value is difficult for average investors. That makes it easy for stock brokers and market experts to sell their knowledge through confidence, bold opinions, and visibility. So many times, self-appointed market experts are not much different than tout services and tipsters in the gambling world.
Make Your Own Evaluations
Benjamin Franklin said, "An investment in knowledge pays the best interest.” Whether you’re investing or gambling, learn to think for yourself. Listen to experts, but do your own analysis, too. Look at your gaming hobby the way an investor looks at stocks and bonds. Online gamblers should get in the mindset of finding the best bets. Do research on the house edge and expected return. Learn about the return-to-player (RTP) a game has. Blackjack and video poker have a low house edge, while progressive slots, scratch cards, and keno tend to have a higher house edge. Baccarat and craps have lower margins, though some craps bets are sucker bets. Roulette and table poker are in the middle of the spectrum.
Compare Risk vs. Reward
Bettors can build a chart of the wagers with the best odds, then compare it against the wagers with the highest payouts. By comparing the two, you'll be able to assess which wagers fit your play style. Investors look at a range of investment options from blue chip stocks to junk bonds and everything in between. Some investors prefer low-risk investments, while other traders take bigger risks for the promise of bigger profits.
Roulette Bets Compared to Investments
Traders investing in a business want to have a better than 50% of making a profit. Roulette does not offer a greater than 50% chance of winning, but it offers something that most investments don't have: a chance at a 3500% profit. American Roulette has a 5.26% house edge, but the straight up bet has a 35-to-1 payout. Take $10 and turn it into $350 with one single spin of wheel. Of course, a straight up bet only hits 1-in-37 spins, so you can expect to lose your stake a lot of the time. Straight up bets are the roulette equivalent of investing in a penny stock and hoping for good news. That being said, straight up bets in roulette have high volatility, so it makes a certain sense to make inside bets. The longer the game goes and more spins happen, the better the chance the house wins. So shorten the game by making inside bets. Before investors get high and mighty about the superiority of their field of speculation, consider all the bad bets available in the field of investments. Smart gamblers understand the odds and seek optimal play. It's easier to be led astray by tipsters, or by that friend who has the "can't miss" stock tip. Here are some examples of bad investment ideas that put roulette bets to shame.
Examples of Bad Investments
- Penny Stocks
- Microcap Stocks
- Commodity Futures
- Leveraged ETFs
- Cash Value Life Insurance
Investors who look at our roulette graphic will notice the one bet a player shouldn't make: the 5-number bet. It's the only wager with a 7.9% house edge, but without the advantage of having higher payouts. The six-line bet has a 5.26% house edge and a bigger payout.
Financial Markets' Lack of Transparency
One huge difference between financial markets and online gambling is transparency. In times when the stock market isn't regulated, the industry lacks the kind of transparency that trustworthy online casinos have. Transparency in a casino comes from knowing what the odds and payouts are. In any legit online or live casino, the rules are posted prominently and the game’s odds are knowable. It's much harder to find unbiased real-time information on the financial markets. Publications and trading houses give their analysis. A vast amount of information is available and some of it's backed by cold hard facts and statistics. A lot of stock analysis is a mixture of opinion, speculation, conjecture, and rumor. It's a mountain of information to decipher, making smart investments harder to execute than smart gambles. Warren Buffet, who made money betting on the horse races before he became one of the world’s most successful investors, says, "Never invest in a business you cannot understand." That's why Buffet famously avoided much of the tech industry. The fact is, most traders don't know about their investments, which is why so many investors get in trouble. Yes, investors speculate on a market that rises over time, unlike gamblers. But in terms of knowing the risks, it's easier to become a smart bettor than it is to be a smart investor.
Bubbles and Hot Streaks: Knowing When to Quit
The comparison between gambling and investment is not always direct. Stock traders point out that the markets rise over time, while gamblers deal with a losing proposition. That's true, but investors overstate their case. The markets rise over time, but that's because more trading positions are added as the population (and thus economy) grows. Individual stocks do not all grow over time. Market speculation during a bubble is akin to a hot streak in betting. First, a wise gambler knows a hot streak is an illusion. More than that, he or she understands when to call it a night, just as a wise investor gets a sense of when to bow out of the market. Winning always ends and bubbles always burst. Don’t wait until it’s slapping you in the face. Make quick, confident decisions and head for the exit. Joseph Kennedy, father of John F. Kennedy, said he knew to get out of stock market prior to the October 1929 crash because his shoeshine boy began giving him stock tips. Kennedy knew if shoeshine boys were speculating on stocks, he was dealing with a bubble market. The market was riding on a general wave of confidence among people who knew nothing about investing, so he knew the bubble would burst soon. Massive sell-offs were around the corner, so he sold much of his stock and shorted other positions. While most of his peers lost their fortunes, Joseph Kennedy built a fortune worth $3.4 billion in today’s money. One only hopes Kennedy gave his shoeshine boy that same advice.
Gambling Terms Compared to Investing Terms
For those interested in pursuing the analogy further, I’ll leave you with a comparison of gambling and investment terminology. Investors deal with a large glossary of terms, just like gamblers do. If you plan on transitioning from one field to the other, here is a primer on concepts which are comparable in each field.
- Transaction Cost: Expenses or fees paid when buying or selling a good or service. This is comparable to the house edge in online casinos, the vigorish or juice in sports betting, and the rake in poker.
- Betting Stake: A player's betting stake is similar to an investor's balance sheet. A player's bankroll also has similar connotations, though a betting stake is a small percentage of a bankroll.
- Return-to-Player (RTP): Is similar to a return-on-investment (ROI) that investors track.
- Blue Chip: Investors seek blue chip stocks, which are investments in solid companies with proven track records. Online gamblers should seek bets with a low house edge for the same reason.
- Junk Bond: A junk bond has a high default risk, similar to a sucker bet. While sucker bets and junk bonds sometimes yield big payouts, you can't bank on it.
- Prospectus: An investor's prospectus contains all the factors to be considered when investing, which equates to knowing the house edge, pay table, and volatility of a bet.
- Basic Strategy: In blackjack, a gambler's basic strategy is the set of plays which provides optimal results. This should be similar to the term "asset allocation", which is a fancy term for your investment strategy.
- Return-on-Investment: ROI tends to track positive expectation or profit, while RTP tends to track a player's expected loss.
- Bull Market: A market where prices are rising, which encourages buying. Gambling seldom has a positive expectation, so few bull markets exist in online gambling.
- Bear Market: A market where prices are falling, which encourages selling. Online gamblers should focus on strategies for a bear market, which is most similar to dealing with either the rake or the house edge.
Online Casino Games: Like Investing in a Bear Market?
Some investors still make money in a bear market, just like some gamblers win despite the house edge. There are huge differences in the two concepts, though. The bear market is a time when share prices are "under pressure", meaning they tend to go down. This is a time when a market downturn has happened and investors fear a recession, meaning the market could drop out anytime. Panic happens in the markets sometimes. The same can't be said about online gambling. When you're betting on blackjack or the slots, the house edge suddenly isn't going to grow without your knowledge. You know the odds at all times. You know the payouts. Losing gamblers chase their losses. Poker players go on tilt. If there's a panic in a casino, that panic exists only in the gambler. That means you're in greater control as a gambler than an investor ever is.