Behavioral finance FAQ / Glossary (Gamble)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Gamble / Gambler / Gambling


00/10i,11i,12i - 02,6i - 03/11i -
06/1d,2i - 08/04d,10d,11d
+ see
game, speculation, anticipation

Got a lucky number and lucky stocks?

In a narrow approach, gambling is associated to just taking part in a game,
in which
people play with money, by committing it according to their
own anticipation of risk vs. rewards
.


But the definition is sometimes extended outside the gaming world, as a few
similarities can be found with some types of asset market speculations (for
example short term trading or high risk investment),

=> That might be why conventional thinking tends often to confuse

speculation, and even investment, with a pure gamble.

But there are also key differences, as seen below,

Similarities and differences between gambling

and other risky occupations, for example asset
trading

Are we always gambling with our own future?
Something as specific to human beings as hay is to horses?


It is true that:

Most human decisions and actions, whatever
   the area, rely on
anticipations (often

combined with - or perturbated by - emotions)
and
risk taking.

 Thus they are, in variable degrees, speculative bets
(see speculation),
if not gambles.


More specifically, to study how people gamble could give some insight

on how they behave in market trading and vice versa;

But between gambling and asset market trading, to take that example,

there are more differences than similarities

In organized gambling, be it casinos, or in some degree sport

betting, the odds are mathematically known, They are
"by design" ... 
against the gamblers: the casino takes its
slice.

But many individuals play the game anyway, occasionally or
recurrently.

Gamblers, contrarily to investors and speculators do not ask
to get paid by a "risk premium" (see that phrase) for their risk
taking,


In stock markets and other assets markets, the "sport"

often called speculation(see that word) is to make "bets" (a
confusing metaphor)
on future economic events.

The appellation can be applied to any high risk investment.

Sometimes it addresses more specifically short term risky
operations (trading).

Short term trading / speculation is generally the most
demonized by armchair moralists.

They tend to assimilate it wrongly to financial deception

(a temptation and way of "playing" thar exist but is different:
see the related glossary article)

        Or to exploitation of mankind (which might exist but in

which speculatiors contributes only when "free money"
excessively created by central banks allows them to play
with the
population's money, not their own

Moralists thus only have a point when it is done  only 

   with other people money, as bank traders that put at risk

bank customers deposit.

But anyway speculation, betting on the future is a
commendable trait
that makes human beings differ
from lettuces
.

Also, technically, speculation differs in some ways from gambling,
even if this other metaphor is also used.

Speculation is not like throwing dices on a carpet, things are
more virtual,there are no dices and no carpet.

Well, online gambling is virtual too, so the main difference is not
here!


What is really different is that:

Speculation works on existing risks (not, like in a gamble,
    which is a risk created by the bettors, and that did not exist
    before the bets) transferred against money from

a person to another.

Speculation needs more thinking, a tentative analysis of how

markets, and the general economy, might evolve.

This is a double-edged difference because in asset markets the
precise odds are unknown
, whatever the statistics, and whatever
the "educated guesses":

History seems to show that in such markets long term
   "probabilities"
(if
we can call them so) are generally in favor
   of the (emotionless) 
"players"

.

Or at least the educated and, above all, disciplined, players

But nobody knows the future, sorry for the platitude.

Therefore, whatever the past "risk / return" statistics seem to
show,
there is always
some uncertainty / ambiguity
(see those words).

Whether they are conscious or not of those hazards, investors
and traders accept to play the "game" (another - confusing -
metaphor).

See below the table on
"Gambling - investment - speculation"

When it becomes addictive

Doing it day and night, unable to stop.

Anyway, when both things, gambling as well as trading / speculation become
addictive, negative similarities emerge, such as:

   Overtrading (see that word) has some common traits

      with problem gambling

        (see below compulsive gambling and suicidal gambling)..

The illusion to recoup one's losses.

.

This illusion entices to throw more money in the game.

This temptation (linked somewhat perversely to loss aversion at
the expense of taking bigger risks)
is rather widely present in
gambling as well as in investing: (see cost averaging, get-eventis),
and also in various other human activities (politics, warfare...).

Why do people gamble?

Conscious moves?
Or automatic ones when becoming addictive?

Such personal decisions to put money at stake, whatever name might
be given to that activity, can be either:

Consciously accepted, knowing that any decision 

(and  non-decision) in life is a gamble (often more based on
uncertainty
than on well known  "casino" risk).

So, as we are betting all the time, why not choose one bet that
seems to give chances
to get rich? Like ...speculation.

Or better still, why not spread our bets, diversify into stocks and
other assets, to limit the stakes and avoid total ruin in case things
go wrong?


Or consciously hedonic, as a game (see game), a challenge.

It might be played just for fun, or to keep oneself active and to fight
boredom and dullness.

In such case it often stays (but not always) inside limits that avoid
total ruin,


Or irrational   as a cognition bias, or emotional bias, with
    a dose
of over-optimism, thinking that at the end things will come
    out positively.

Or unconscious as a simple automaticity / habit.


Or in its extreme form a psychological disorder
( addiction /urge) as is the case in compulsive gambling,


This can be started by a commitment (see "foot in the door") and
followed by stubbornness, which leads little by little to raise the
ante.

Also, experiments show that people remember their gains more
vividly
than their losses.

This builds positive thinking, even magical thinking, that incites to
go on betting.

Even professional traders can fall into those mental traps
andget overridden by emotions (wishful thinking, loss aversion,
pride...).

The largest trading losses in History were from individuals who
kept stubbornly and increased their exposure, breaking
progressively all limits, either to recoup their losses or because
of a growing narcissism and sense of invincibility.

  Or, in some cases - consciously or unconsciously - suicidal
    (see ...Dostoyevsky novels).

Gambler's fallacy / paradox


01/3i,9i - 03/1d,2i - 08/10d

+ see representativeness,
reversion + bfdef2

Believing the dice stick to some agenda.

The gambler's fallacy, and its opposite, the "reverse gambler's fallacy",
are forms of representativeness heuristics, (see that phrase) by which people:

See patterns where there are none.

Get the illusion that recent results indicate the next ones, as if markets,
   for example, have memory.

More precisely , the gambler's fallacy is the idea, rather common to gamblers
(and some market traders), that a recent run of rises or falls will be followed
by a corrective reaction, such as "reversion to the mean".

Conversely, the reverse fallacy is thinking that short term runs will persist.

This fallacy makes gamblers forget that statistics work
   with long series.

Of course, in the long term, the frequencies of events might
average out, but this does not exclude that in the short term
elongated clusters of similar outcomes occurs.


The reverse gambler's fallacy leads investors to adopt trend 
    / momentum following
for an exaggeratedly long time.

They are under the half true or half false impression that, in real
life, trends always last longer than reasonable people would think.
Thus the trick is to guess "how far you can go too far".

Anyone can choose his own fallacy ;-) But better lean towards caution!

 

Gambling - investment - speculation


See gamble, speculation,
trading, active / passive
management

A comparison can be done as follow

 

Gambling

Speculation

Investment

Risk nature



Inexistent risk
before the bet
,

the bet creates the risk

.

Exchange of existing
risk / potential reward
situations between
a buyer and a seller.

Either building a risk 
/ reward situation
(business creation) or
more often exchange
of such a situation.

Probabilities

Odds are usually known

in organized gambling.

Some probability tools might be applied

but the basis is a general uncertainty.

Time horizon

Short term usually.

Long term.

Social
environment

Leisure, hobby.

Economic / financial
fluctuations and liquidity

Economic project,
business financing.

Psychological
drive

Fun, greed, fear or
addiction, intellectual
challenge /
competition
in some cases.

Greed, fear, challenge,
status / trophy
or addiction.

Savings, long term
safety, challenge.

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