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.

4. Is Trading Gambling?... Part 1

Is Trading Gambling?...A view from Michael J. Gutmann (Futures Magazine)

This topic is one of the most hotly debated issue in trading. However, before we start the discussion, I think it is important to start with a neutral mindset and not be prejudice over any perspective or opinion. Although we may still have a different conclusion or opinion at the end of this discussion, but it is important that we discuss this with an open mind and take effort to understand and hopefully agree with the facts. 

Trading and gambling has many similarities. Both require risk taking. Both is a zero-sum game. Meaning, there is a winner in every looser, it is purely a transfer of wealth from the looser to the winner with no additional wealth created. But is trading totally gambling? Most people who are not directly in the financial trading marketplace would think so.  I once came across an article in the Futures Magazine website posted as a blog by Michael J. Gutmann entitled "Are Trading and Gambling the same?". Gutmann had discussed the topic quite comprehensively, especially on the reason why society has a negative view on trading. 

Gutmann mentioned in his blog that one of the reason why people are skeptical about trading is because the outcome, like gambling is unpredictable. Society generally prefers the shoemaker-type endeavor because it creates something others find valuable. New wealth creation simply means capital gain out from an effort put into an activity that creates value to whoever is willing to pay for that effort. For example a shoe-maker. Trading and gambling are both fundamentally stochastic, that is unpredictable, and because of this they are often viewed negatively. We feel an “honest effort” has more predictability to it. However, most people will have a more positive view on an investor when compared to a trader even when both investor and trader involve in taking risk in the financial market. Gutmann said that this is so because investment enable new wealth creation because it involves delayed gratification – new wealth can be realized after a longer period time either due to appreciation of the stock value (note that depreciation of the value can also happen). There seems to be an inherent respect for a long-term investment that turns out well: The successful investor is considered patient and prescient. On the other hand, trading and gambling have a get-rich-quick aura to them and are often viewed with disdain because of it.

Gutmann went on to discuss the differences between trading and gambling in terms of how each of them executes their trades. From the article, traders may view themselves more technical, even scientific, than gamblers, relying on intricate formulas and algorithms for success. But there are professional gamblers who use probability and statistics to help them increase their chances to win. There are gamblers who have invested equally in their success relative to the sophisticated traders. One obvious different which I see is that traders pits their skills and knowledge against the vast market. Gambling generally pits individual against another individual. 

Although the blog did not end with a very clear conclusion for our question, Gutmann did however said that whether trading and gambling is the same or not, very much depends on the individual involved.  His statement probably sum up my thoughts. However, before we conclude my position on this question, I would like to discuss, in my next section, with a few more points not covered by Gutmann in the second part of this discussion on "Is trading Gambling?". Hopefully, we are able to draw a better conclusion. 

Proverbs 18:2... Fools find no pleasure in understanding but delight in airing their own opinions.