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View Full Version : Investing, Trading and Gambling - What's the Difference?



Jim
12-07-2012, 12:08 PM
Prompted by Dr. T's festive debate with his brother in law regarding precisely what constitutes "gambling", here's a place to discuss different timeframes, and if you're from the UK different taxation regimes.

In particular, what differentiates an "investor" from a "trader" from an "auto-trader" from a "spread better"?

Dr_T
12-07-2012, 10:40 PM
Hi Jim,
Thanks for introducing a new thread on this subject!

Since we're coming up to Christmas, I'll kick off with a few thoughts! What interests me about the nature of gambling, is that to me, it seems to be an almost entirely arbitrary designation. For example, what distinguishes the activity of starting a new business (with the intention of turning a profit), from any form of financial market speculation? Both activities are ultimately governed by the perceived probability of success, but equally, both can suffer disastrous drawdowns or unprecedented growth. A previous colleague of mine argued that short term holding of financial instruments diminishes trading to gambling. However, to make this distinction requires an arbitrary line to be drawn in the sand. For example, if the distinction between gambling and trading is holding times of less than a month or more than a month respectively (for example), then 1 day less than a month would be a gamble. The reason that I think it important to consider these things is that, in some quarters at least, gambling is considered morally reprehensible but trading is respectable (I'm including having a business that literally trades in physical objects or services here). Perhaps we can look at all of these activities as probabalistic, where decisions are made on the basis of perceived or actual risk vs. reward. Incidentally, a Maths lecturer colleague has suggested to me that the Bayesian probability framework is considered by some to represent mathematically how the human brain makes decisions. It's interesting to note also that Microsoft's recently demonstrated speech translation tool reportedly operates using Deep Belief Networks, I believe that these are a kind of Bayesian Neural Network...

So... am I leaning towards the conclusion that all activities in life are 'a gamble'?

I'm not sure about that...(once again, define gamble!). The present understanding of quantum mechanics is probabilistic (hence Einstein's famous quote "God does not play dice"). However, it is not known (experimentally) if the observed uncertainty principles of quantum mechanics are driven by an underlying deterministic 'law'... I'm going outside of my education background now, but I believe that this is where some areas of the mystically named 'string theory' sit.

Well, maybe my ramblings will make some sense and be worthy of continued discussion.

Cheers,
Dr T

Dr_T
01-04-2013, 10:24 AM
I had to renew my car insurance yesterday. Upon reading the terms and conditions, I noticed that the company does not cover 'professional gamblers'. However, it seems that 'traders' are fine. This arbitrary distinction between gambler and trader clearly has consequences beyond taxation.

So, depending on whether you make a living using a spread bet or 'proper' FX account could invalidate your car insurance... and probably other forms of insurance too.

Cheers,
Dr T

Dr_T
01-15-2013, 08:10 PM
I've recently been reading a little about "Shannon's Demon" and came across this interesting article (http://www.bjmath.com/bjmath/thorp/paper.htm)... where the author mathematically blurs the distinction between trading and gambling. For those who are interested, I arrived at the above link via this site (http://cssanalytics.wordpress.com/2009/12/03/a-comparison-of-kelly-and-shannon-strategies-vs-buy-and-hold/).

Cheers,

Dr T

silverado8
01-22-2013, 11:27 PM
A gamble is a bet and a trade seems to be a subset of a bet where the the risk is seemingly more quantified by applying 'mumbo jumbo' theory prior to waving goodbye to your money :). I'm with Dr_T on this where everything in life is a gamble, and further think trades and bets are sometimes only distinguishable from each other in terms how respectable they are deemed as being. [ trades <-> betting activity of specialists having domain-knowledge in their field, and utilising hedging and correlations to mitigate risk ],
[ bets <-> betting activity of mug punters ].
How true is this bearing in mind the state of our 'esteemed' investment banks due to recent 'trader' activities ?! Also interesting is that Bookies seem more adept at managing their books and maintaining profits, through the use of the over-round. - maybe the reins of the corporate banking world are safer in the hands of the likes of these big bookies. I'd certainly feel safer !

Jim
01-24-2013, 11:32 AM
Hi Dr_T,


I've recently been reading a little about "Shannon's Demon"

Sounds like you're heading in the direction of Ralph Vince's "Optimal F" (http://www.dummies.com/how-to/content/the-optimal-f-money-management-style.html)? Maybe we should start a thread on Mathematical Money Management (MMM for short)?

Actually "gambling" at blackjack might be more amenable to such methods than "trading" FX. There's (usually!) 52 cards in every pack in the future, as well as in the past.

Cheers,

Jim

silverado8
01-24-2013, 11:16 PM
MMM would be a great addition. Unfortunately these days blackjack has up to 6 decks and burn cards meaning that we're never quite sure about the 52. We'll have to blame it all on Ed Thorp (Beat the Dealer)

Jim
01-28-2013, 02:16 PM
Your wish is my command! Please see the shiny new thread "Can you stand the heat in the trading crucible? (http://community.trading-gurus.com/threads/1310-Can-you-stand-the-heat-in-the-trading-crucible)"

I guess all those burnt cards means that if you do it right "trading" has a greater positive expectancy than "gambling", in this day and age at least?