Gambler or Investor? The Truth About Why We Trade# Stock
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Gambler or Investor? The Truth About Why We Trade
Getting at the 'Thrill,' From Neuropsychology to Gamblers Anonymous
By
David Weidner
It is a well-worn cliche. The stock market is the capitalist casino, a place
where gambling wears a thin mask called investing.
It is a place where "buy gold" or "buy Pandora" can sound a lot like "come
on, seven!"
The idea, of course, is that we so-called investors aren't actually putting
our money to work. We are engaging in a socially acceptable version of the
lotto. We are betting the odds. Like a player at the craps table, we are
trying to get hot—riding the momentum of a bull market, pulling back when
the wheel of fortune goes cold.
And, just as anyone who goes to Las Vegas knows that the house usually wins,
investors know that trading can be a cruel game.
There is some truth to that analysis, of course. But is it the whole truth?
Is Warren Buffett simply playing a more respectable version of Texas hold '
em? Is John Paulson counting mortgages like card counter in a game of single
-deck blackjack?
The answer to a large degree depends on whom you ask. Investors, academics,
gambling addicts and psychologists all have their own take. Neurologists
have their own observations about pleasure centers in the brain. A common
thread runs through the different opinions: We get in trouble when we trade
for thrills.
"In gambling, the act is done for the love or 'thrill' of it," said Prakesh
Deeriya, a finance professor at the University of North Texas.
In that way, the thrill of gambling differs from trading, Mr. Deeriya said ,
because "the 'thrill' itself is the reward. In speculation, the return on
investments is the reward, or at least the expectation of getting a return
is the reward."
The distinction changes, he said, when a trader gets the thrill from pushing
the button, when the high comes from playing the game, rather from winning
it. "If it is there," he said, "then one can say that is gambling."
Not surprisingly, investors have a different take depending on their
discipline. Elie Rosenberg, who runs the ValueSlant.com blog is a value
investor. He sees the distinction between gambling and investing as a
distinction between buy-and-hold investing and speculation.
Mr. Rosenberg quotes American economist Ben Graham, who argued that "
investment is most successful when it is most businesslike. An investment
operation is one which, upon thorough analysis, promises safety of principal
and a satisfactory return."
Anything else, Mr. Rosenberg says, is probably gambling.
Gambling addicts would probably agree. A Gamblers Anonymous member told me
that investing is a common topic in the group's discussions. Some members
share stories about how obsessive trading disrupts lives and leads to
financial and personal ruin.
The group has a general rule that members should hold a stock for at least
18 months—if they invest in stocks at all. Commodities and options trading
seem to be a particular problem.
The link between gambling and trading isn't just a personal one, said Steven
Weisman, a professor who teaches entertainment and gambling law at Bentley
University in Boston. Recent Internet gambling laws have excluded day
trading which, he said, "is as much of a gamble as any throw of the dice or
bet on a horse."
Mr. Weisman seems to agree that long-term investing is different from
speculative trading, which is more akin to gambling. He notes that the
brokerage firm Cantor Fitzgerald launched a mobile gaming device for casino
use that piggybacks on technology developed for the markets.
Sometimes, the line between investing and gambling can be hard to see. Tony
Emerson, an investor and gambler in Austin, Texas, said that what starts out
as research-driven investing can turn into a blind gamble quickly.
"Consumer sentiment is impossible to predict," Mr. Emerson said. "Models and
analyses that once seemed to work to predict stock movement failed when the
economy crashed."
Still, it doesn't take a market collapse for the similarities to show
themselves.
"The losses and gains are generally less dramatic than craps, blackjack,
roulette or poker. But just like gambling, the more you risk, the more you
stand to gain," Mr. Emerson said.
The real problem, according to Todd Tresidder, a former hedge-fund manager
who is now a financial coach, is that most people don't understand the odds.
He argues what sounds like card-counting the markets: knowing the math
takes gambling out of the equation.
"If you invest like most people, there is no difference," Mr. Tresidder said
. Investors, he argues, understand the odds. "The only way you will profit
over time is either by sheer luck or by betting on positive mathematical
expectancy situations," he said.
Mr. Tresidder has a point about knowing the odds, but don't a lot of
gamblers know the odds? They pull the trigger, make the wager, or trade
anyway. It is the thrill of betting that they love.
Maggie Baker, a clinical psychologist in Philadelphia, said that the
neurological similarities between traders and gamblers are striking. Whether
they are about to make a trade or plunking down a bet, the pleasure center
in the brain lights up, Ms. Baker said.
It says: "Oh, boy, I'm going to do something that's going to make me money."
It isn't too different from the anticipation for sex, Ms. Baker added. "In
some ways, it's better to hope than get," she said.
Of course, this kind of stimulation can be dangerous. And that is why Ms.
Baker said it is important to be mindful of two major factors in our control
a floor of a casino in that regard. There is a lot of social support for
addictive behavior.
And what are our motives? Are we trying to impress people? Empower ourselves
? Is it tied to our self-esteem?
Ultimately, the difference between healthy investing and gambling comes back
to the thrill. When that becomes the sole purpose of buying and selling
securities, investors have crossed the line. They are gamblers.
They will be until the thrill and, likely the money, is gone.
Getting at the 'Thrill,' From Neuropsychology to Gamblers Anonymous
By
David Weidner
It is a well-worn cliche. The stock market is the capitalist casino, a place
where gambling wears a thin mask called investing.
It is a place where "buy gold" or "buy Pandora" can sound a lot like "come
on, seven!"
The idea, of course, is that we so-called investors aren't actually putting
our money to work. We are engaging in a socially acceptable version of the
lotto. We are betting the odds. Like a player at the craps table, we are
trying to get hot—riding the momentum of a bull market, pulling back when
the wheel of fortune goes cold.
And, just as anyone who goes to Las Vegas knows that the house usually wins,
investors know that trading can be a cruel game.
There is some truth to that analysis, of course. But is it the whole truth?
Is Warren Buffett simply playing a more respectable version of Texas hold '
em? Is John Paulson counting mortgages like card counter in a game of single
-deck blackjack?
The answer to a large degree depends on whom you ask. Investors, academics,
gambling addicts and psychologists all have their own take. Neurologists
have their own observations about pleasure centers in the brain. A common
thread runs through the different opinions: We get in trouble when we trade
for thrills.
"In gambling, the act is done for the love or 'thrill' of it," said Prakesh
Deeriya, a finance professor at the University of North Texas.
In that way, the thrill of gambling differs from trading, Mr. Deeriya said ,
because "the 'thrill' itself is the reward. In speculation, the return on
investments is the reward, or at least the expectation of getting a return
is the reward."
The distinction changes, he said, when a trader gets the thrill from pushing
the button, when the high comes from playing the game, rather from winning
it. "If it is there," he said, "then one can say that is gambling."
Not surprisingly, investors have a different take depending on their
discipline. Elie Rosenberg, who runs the ValueSlant.com blog is a value
investor. He sees the distinction between gambling and investing as a
distinction between buy-and-hold investing and speculation.
Mr. Rosenberg quotes American economist Ben Graham, who argued that "
investment is most successful when it is most businesslike. An investment
operation is one which, upon thorough analysis, promises safety of principal
and a satisfactory return."
Anything else, Mr. Rosenberg says, is probably gambling.
Gambling addicts would probably agree. A Gamblers Anonymous member told me
that investing is a common topic in the group's discussions. Some members
share stories about how obsessive trading disrupts lives and leads to
financial and personal ruin.
The group has a general rule that members should hold a stock for at least
18 months—if they invest in stocks at all. Commodities and options trading
seem to be a particular problem.
The link between gambling and trading isn't just a personal one, said Steven
Weisman, a professor who teaches entertainment and gambling law at Bentley
University in Boston. Recent Internet gambling laws have excluded day
trading which, he said, "is as much of a gamble as any throw of the dice or
bet on a horse."
Mr. Weisman seems to agree that long-term investing is different from
speculative trading, which is more akin to gambling. He notes that the
brokerage firm Cantor Fitzgerald launched a mobile gaming device for casino
use that piggybacks on technology developed for the markets.
Sometimes, the line between investing and gambling can be hard to see. Tony
Emerson, an investor and gambler in Austin, Texas, said that what starts out
as research-driven investing can turn into a blind gamble quickly.
"Consumer sentiment is impossible to predict," Mr. Emerson said. "Models and
analyses that once seemed to work to predict stock movement failed when the
economy crashed."
Still, it doesn't take a market collapse for the similarities to show
themselves.
"The losses and gains are generally less dramatic than craps, blackjack,
roulette or poker. But just like gambling, the more you risk, the more you
stand to gain," Mr. Emerson said.
The real problem, according to Todd Tresidder, a former hedge-fund manager
who is now a financial coach, is that most people don't understand the odds.
He argues what sounds like card-counting the markets: knowing the math
takes gambling out of the equation.
"If you invest like most people, there is no difference," Mr. Tresidder said
. Investors, he argues, understand the odds. "The only way you will profit
over time is either by sheer luck or by betting on positive mathematical
expectancy situations," he said.
Mr. Tresidder has a point about knowing the odds, but don't a lot of
gamblers know the odds? They pull the trigger, make the wager, or trade
anyway. It is the thrill of betting that they love.
Maggie Baker, a clinical psychologist in Philadelphia, said that the
neurological similarities between traders and gamblers are striking. Whether
they are about to make a trade or plunking down a bet, the pleasure center
in the brain lights up, Ms. Baker said.
It says: "Oh, boy, I'm going to do something that's going to make me money."
It isn't too different from the anticipation for sex, Ms. Baker added. "In
some ways, it's better to hope than get," she said.
Of course, this kind of stimulation can be dangerous. And that is why Ms.
Baker said it is important to be mindful of two major factors in our control
a floor of a casino in that regard. There is a lot of social support for
addictive behavior.
And what are our motives? Are we trying to impress people? Empower ourselves
? Is it tied to our self-esteem?
Ultimately, the difference between healthy investing and gambling comes back
to the thrill. When that becomes the sole purpose of buying and selling
securities, investors have crossed the line. They are gamblers.
They will be until the thrill and, likely the money, is gone.