Gambling is defined as staking something on a contingency — wagering money on something that has an uncertain and potentially negative outcome. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are gambling without even knowing it — trading in a way, or for a reason that is completely dichotomous with success in the markets.
In this article, we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place.
KEY TAKEAWAYS
- There are two common traits in those who exhibit gambling tendencies when trading.
- If a person trades for excitement or social proofing reasons, rather than in a methodical way, they are likely trading in a gambling style.
- If a person trades only to win, they are likely gambling. Traders with a "must-win" attitude will often fail to recognize a losing trade and exit their positions.
Hidden Gambling Tendencies
It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. Yet discovering the underlying motives behind our actions can help us change the way we make decisions in the future.
Before delving into gambling tendencies when actually trading, one tendency is apparent in many people before trading even takes place. This same motivator continues to impact traders as they gain experience and become regular market participants.
Social Proofing
Some people may not even have an interest in trading or investing in the financial markets, but social pressure induces them to trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market). People feel pressure to fall in line with their social circle. Thus they invest so as not to disrespect or disregard others' beliefs or feel left out.
Making some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. However, entering into a financial transaction without a solid investment understanding is gambling. Such people lack the knowledge to exert control over the profitability of their choices.
There are many variables in the market, and misinformation among investors or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs.
Contributing Gambling Factors
Once someone is involved in the financial markets, there is a learning curve, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. How the person approaches the market will determine whether they become a successful trader or remain a perpetual gambler in the financial markets.
The following two traits (among many) are easily overlooked but contribute to gambling tendencies in traders.
Gambling (Trading) for Excitement
Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing money in the markets, losing money on a trade will allow that person to enter the conversation with their own story.
When a person trades for excitement or social proofing reasons, it is likely they are trading in a gambling style, rather than in a methodical and tested way. Trading the markets is exciting—it links the person into a global network of traders and investors with different ideas, backgrounds, and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows, is likely to detract from acting in a systematic and methodical way.
Trading to Win, and Not Trading a System
Trading in a methodical and systematic way is important in any odds-based scenario. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading.
While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out:
Taylor buys a stock they feel is oversold. The stock continues to fall, placing Taylor in a negative position. Instead of realizing the stock is not simply oversold and something else must be going on, Taylor continues to hold, hoping the stock will come back so they can win (or at least break even) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions, because to do so would be to admit they lost.
Good traders take many losses—they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions after original entry conditions have changed or turned negative means the trader is now gambling and no longer using sound trading methods (if they ever were).
Is Investing Basically Gambling?
Investing is the act of committing capital to an asset like a stock, with the expectation of generating income or profit. Gambling, on the other hand, is wagering money on an uncertain outcome, that statistically is likely to be negative. A gambler owns nothing, while an investor owns a share of the underlying company.
Is Gambling a Smart Way to Make Money?
Statistically, gambling is not a smart way to make money. The odds are against the gambler, with the house having a built-in mathematical advantage that grows over time. While it is possible to win a big payout, or to mitigate risk through selective playing based on research and odds, overall, most gamblers will end up losing money.
Is It Better to Invest Than Gamble?
While both involve minimizing risk to reap rewards, an investor's odds are generally better than that of a gambler. That's because with gambling, the house has an edge, a statistical advantage over the gambler that grows the longer the person is playing. A gambler can still strike it big, but it's more likely the person will ultimately lose. Investing can yield great losses, but the stock market generally appreciates over time, and if you keep investing, the odds are generally in your favor, certainly more so than for a gambler.
The Bottom Line
Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted, which results in taking action in a field one knows little about.
Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, relying on emotion or a must-win attitude to create profits—rather than trading in a methodical and tested system—indicates the person is gambling in the markets and unlikely to succeed over the course of many trades.
