“Las Vegas is busy every day, so we know that not everyone is rational.” – Charles Ellis
Gambling can be seen as harmless fun and an easy way to make money, but when it gets out of hand – it can be a problem. It can quickly get out of hand because it’s highly emotionally charged and those in the game seldom stick to rational decision-making.
We see these same challenges with investing, and the emotional veil can cause us to lose our rationale and confidence to stay invested. One of the significant differences between gambling and investing is that where gambling is based on chance, investing is based on patience.
Investing and gambling also include some level of risk that the involved parties choose to accept, but, even in this, they are quite different. With investing, we can employ strategies to mitigate risk. Diversification is a strategy that spreads risk across all asset classes, whereas gamblers throw their capital into a single pot with no risk mitigation strategy. Investing allows us to plan and direct our funds appropriately.
Benjamin D. Summers explains risk like this: “When I’m asked to define risk, this is the answer: Risk is not a story; it’s not a relationship; it’s not a feeling, and risk is not an asset class. Risk is a number: It’s the probability of loss weighted by the potential degree of that loss.”
In an article he wrote for Forbes, Summers says that most of us understand that a casino’s business model is predicated on the odds of the games and, in many instances, takes a more rigorous approach to protect their money. Only one variable distinguishes investing from gambling: The probability of losing on a gamble consistently exceeds the likelihood of gain; in investing, the probability of a gain is expected to exceed the probability of a loss.
Another clear difference is seen in access to information. With investing, we have access to all the necessary information to make an investment decision. This enables us to perform due diligence and find ways to mitigate risk as well as reduce the uncertainty surrounding a strategy. Meanwhile, with gambling, gambling agencies are not required to disclose any information to us, which forces us to go in blind.
Ironically, the first and second betters in a poker game are called the Small Blind and Big Blind, and their purpose is to get money in the pot as an incentive for the others to bet and stay in the round.
People rely on the same visceral cues that drive social interactions to make investment decisions. This is why so many lose their confidence to stay invested when the perception of risk increases. If you need the confidence to remain invested, please reach out and engage with our team so that we can help you benefit from investing and avoid the pitfalls of gambling.