6. Is Trading Gambling?...Conclusion

Is Trading Gambling?...How to Differentiate?...Conclusion

We have looked into various comparisons of gambling, trading and running a business in the last two posts. Let us summarized the similarities and differences in the following table: 

Characteristics	Business	Trading	Gambling
Risk taking required.	X	X	X
Uncertain Outcome	X	X	X
New wealth created.		O	O
Success achieved in a short term.		O	O
Outcome totally by chance			O
Outcome affected by economical, political and environmental factors.	X	X
Part of the outcome can be controlled by participant.	X	X
Value Add to the society or the market	X	X
Probability of success increase with knowledge and effective market study and analysis.	X	X
Pits their skills against the market players.	X	X
Can withdraw from the activity anytime.	X	X

Are we able to clearly differentiate gambling and a non-gambling from the comparison seen above? As you can see, there are only two characteristics of trading that are similar to gambling. They are: 

• No new wealth created and 
• Success achieved in a Short term. 

Unfortunately, these are the two reasons why trading is perceived as gambling for most people, which was discussed in my first post on Is Trading a Sin...A view from Michael J. Gutmann.

There are obvious characteristics in gambling that are similar to trading and running a business. In fact, some these  We can see that all three activities requires some level of risk taking and all three do not have a 100% certainty in their outcome.  Just like a lot of things in life which do not have complete certainty in their outcome, we do not claim all these to be gambling if one participates in it. A good example is investment which has a lot of similar characteristics to running a business, like risk taking and uncertain outcome. But very few people will say one is gambling if he invested his savings in stock or bonds, hoping for a return of investment which is higher than putting in a bank to earn interest. Like trading and running a business, he is also participating a some level of risk taking. So, is taking risk gambling? Well, not everyone will agree with this statement. 

Let's take another point in the list above, the amount of time within risk taking activity, to see if this is a good argument to say an activity is gambling or not. Take the example of the chicken seller who who chose just to do his trade only within the business day and do not leave any overnight. Does that makes him more a "gambler" then those who do their business with a longer term view? Is there a big difference between a day-trader and the chicken seller with the way he conducts his business in a short time frame? 

We can go through the same argument over each of the points stated above and you will notice that there is a counter gambling argument for every gambling characteristic. However, in a closer look, I felt that there is a set of key characteristics when combined, can almost always say the activity is gambling if all of the following are present: 

• When risk taking is required and the outcome is uncertain. 
• There are no new wealth created. 
• When the activity does not add value to anyone other then the participant himself. 
• When the outcome of the activity is completely or almost totally by chance. There are a couple of scenarios that this can be met:
• When one continues to participate in the activity without any knowledge of the probability of the outcome that is able to guide him to a reasonable and logical decision whether or not to participate in the activity. Any favorable outcome from it is totally by chance.
• When one continues to participate in an activity knowing that the probability of a favorable outcome is low.  Any favorable outcome from it is totally by chance.

The above four characteristics are always found in an act of gambling whether it is done in the casino or in the trading market or even in running a business. For example, you will notice that both business and trading can both be made into gambling if one chose not to ignore some of the important factors or characteristics stated above. A trader is considered to be gambling if he enters a trade without a thorough analysis to understand the current state or trend of the market. There are traders that make their decision purely based on recommendations from brokers, analyst or even based on the high volume of participation in a particular market, without any knowledge or without any analysis of the stock that he is buying. Any outcome regardless whether it is favorable or unfavorable is totally by chance. There are also traders who did all the necessary analysis and found that the odds is not in their favor but still continues to proceed with the trade hoping they will be "lucky" to get it right. In most cases they will be wrong for they are gambling in the financial trading market. 

Conclusion

The most basic characteristic of gambling is risk taking. But there is a difference between "calculated" risk and "mindless" risk taking. "Risk" is taking a chance and "calculated risk" is taking a chance after considering the probable outcomes. One must factor in the implication of the outcome as well as the probability of such outcomes. Gambling is risking taking without the process of understanding the probable outcome or taking risk knowing the probability of the outcome is unfavorable.

I once read an article from Jason Zweig who writes The Intelligent Investor for Wall Streets Journal. 

He said: “We underestimate the likelihood and severity of common risks and overestimate the likelihood and severity of rare risks. When we feel we are in charge and we understand the consequences, the risks will seem lower than they truly are. When a risk feels out of hands and less comprehensible, it will feel more dangerous than it actually is.”

Life is filled with opportunities for risk taking. Be it in business, at work, trading, or even deciding which destination for your vacation.  The question is whether efforts were made to understand what one is stepping into so as to increase the probability of a favorable outcome. For non-traders who thinks trading is gambling, maybe the lack of knowledge or understanding of financial trading makes you feel that it is more dangerous than it actually is...thus claiming it to be gambling.

Proverbs 2:11...Discretion will protect you, and understanding will guard you.

5. Is Trading Gambling?... Part 2

Is Trading Gambling?...A view based on the legal definition of gambling.

Michael J. Gutmann tried to answer the question by comparing the differences and similarities of trading and gambling. Now, let us look a little deeper into it from a different point of view. We will start from the definition of gambling and see how or how not financial trading fits into gambling. 

Gambling is an activity of betting or wagering of something of value on an event with an uncertain outcome with the primary intent of winning something of value. In another words, to take a risk in the hope of gaining an advantage or a benefit. The legal definition of gambling: "includes any activity when a person pays something of value (consideration) to participate in an event that presents the possibility of winning something of value (prize) whose outcome is determine at least in part by chance". (Rose, 1986). 

In addition to the definition, ProblemGambling.ca, also included the elements of gambling. 

• One needs to realize that by gambling, something valuable is being put at risk.
• The outcome of the act is determine by chance.
• Once a bet is made, it is irreversible. 

From these definitions, the outcome of gambling is uncertain and determined by chance. Regardless of what one does prior to taking the risk, the probability of the outcome is almost 50/50. Nothing or very minimal can be done prior to the action to study the probability of the outcome which is able to help in the decision whether to proceed with the action, except "hoping".  If a fair dice is thrown, the outcome of the number facing up is completely by chance. Likewise, the outcome from the jackpot machine is also totally by chance although many may say that the algorithm in a electronic jackpot machine may has some effect over the outcome. But this is not the correct platform for this discussion. However, like all games, some level of skills is required to increase the probability of winning just like any other games. Comparing it to running a business, say selling shoes; although the outcome is not 100% certain in a long run, but efforts can be done prior to starting the business by studying the probability of success through market study and analysis. Although, there is some element of risk, but there is an higher level of confidence of success through effective decision making. 

Hoping

We can also apply the same argument in financial trading.  One major factor for a trader to make money from the fluctuation of prices is the ability of trader to analyze the market data accurately to enter and exit the market at the correct time. The science of determining the time to enter and exit the market is call Technical Analysis. It makes use of past data and statistics to help traders to study the demand and supply of stocks in the market. It can also determine the price momentum of which indirectly shows the market sentiment of a particular security. Traders can also use fundamental performance data of a company to decide if he or she should invest their money by buying their shares. We call this Fundamental Analysis. Comparing trading with doing business, Technical Analysis and Fundamental Analysis is similar to market analysis, although not completely. What is similar is that market analysis, like technical analysis, is able to help businessman to determine when to enter the market and how the product should be sold as stated in the previous paragraph. 

There is also something in common for financial trading and running a business. Both outcome although uncertain and face the possibility of losing all or part of the money they put into the activity. But both are largely dependent on the market sentiment. The outcome of trading depends on market forces which is driven by the millions of traders, investors and thousands of institutional players participating in the market. Except for a few individuals that have enough resources to manipulate the market, in most cases a single trader may not be able to influence the price movement. As the number of available shares per stock are limited in the market, the key reason for the price to move up or down is demand and supply respectively, like the the prices of chickens explained in the section on "The Role of a Trader".  Unfortunately, the cause of the supply and demand to change can also be caused by greed which drives the market up and fear which drives market down. Very often, greed and fear is triggered by economic, political and environmental factors, which directly affects the supply and demand of securities, bonds, products and services, with the final impact on price. When we compare this with gaming in which all can be used for gambling, the gambler and the number of gamblers is not able to (or at least legally not supposed to) influence the outcome of a fair game. The number of players putting a bet on a specific number in the game of Roulette will not be able to influence the outcome of the winning. The number of people betting on a particular horse in horse racing will not be able to influence the winning horse. Thus, the outcome of gambling in a game does not depend on the number of participants unlike financial trading or running a business. 

Technical Analysis & Fundamental Analysis

The other point to note is gambling is irreversible once a the gambler committed in the game by making his bet. The gambler will only know the outcome after the completion of the game. In another word, the person who took the risk have completely no control or influence over the outcome of the event the moment after the bet is made. Once the token is inserted into the jackpot machine, the gambler must complete the process to decide how much he will get back. When a poker player places his bets on the table, he will not be allowed to withdraw partially of fully from the game until the round of the game ends. Unlike selling shoes, the shoe-maker can at any time in the process of business can stop selling shoes for whatever reasons. Also, unlike financial trading, the trader is able to withdraw from the trade anytime he wants without loosing all his money in that trade. 

Well, I hope there are enough examples from this and the previous section to finally conclude if trading is gambling or not. We will conclude this in the next section. 

Proverbs 10:2-5...
2     Ill-gotten treasures have no lasting value, but righteousness delivers from death. 
3     The Lord does not let the righteous go hungry, but he thwarts the craving of the wicked. 
4     Lazy hands make for poverty, but diligent hands bring wealth. 
5     He who gathers crops in summer is a prudent son, but he who sleeps during harvest is a disgraceful son.