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Paul
Topic Author
Posts: 11250
Joined: July 20th, 2001, 3:28 pm

### Gambling and trading, what is the difference?

Suggested by ScilabGuruP
Last edited by Paul on January 10th, 2004, 11:00 pm, edited 1 time in total.

LongTheta
Posts: 1504
Joined: August 3rd, 2003, 6:06 am

### Gambling and trading, what is the difference?

According to a very professional trader, and a highly respected contributor to this forum, there is no difference. I'll let him come forward and explain his point of view.

reza
Posts: 3013
Joined: August 30th, 2001, 3:40 pm

### Gambling and trading, what is the difference?

is that NNT??

Posts: 284
Joined: July 14th, 2002, 3:00 am

### Gambling and trading, what is the difference?

In gambling the rules of the game are defined, i.e. there's no model risk. Not so in asset pricing, and hence in trading...

ScilabGuru
Posts: 297
Joined: October 16th, 2001, 2:14 pm

### Gambling and trading, what is the difference?

QuoteIn gambling the rules of the game are defined, i.e. there's no model risk. Not so in asset pricing, and hence in trading... This is why gambling can be considered as a simple model of the market where all models are true models. So if you don't understand the gambling rules/risk/models - then don't think about trading too. I met so many situations when people are talking about very sofisticated models, measures, bla, bla, bla and cannot solve the simplest probability riddle from the gambling world. (Actually I am not an exeption - I like gambling puzzles but not all of them are easy for me)

ScilabGuru
Posts: 297
Joined: October 16th, 2001, 2:14 pm

### Gambling and trading, what is the difference?

When everything is known from model's point of view (probabilities and payoffs) the optimal derived strategy becomes a pure mathematical problem. Coming back to the trading we split our problem into two 1) Assume that the model we have is the "true" model, or more preciesely - estimate probabily that our model is the "true" model. (In gambling this prob. is equal 1) 2) Derive a trading strategy conditionally to the above assumption. Then having set of different models one can construct an "portfolio" of different startegies weighted by the probability of the model.

DominicConnor
Posts: 11684
Joined: July 14th, 2002, 3:00 am

### Gambling and trading, what is the difference?

Posts: 32
Joined: January 7th, 2004, 11:39 am

### Gambling and trading, what is the difference?

Let's make a market with the underlying: payout per contract 100 if there is no evidence of any difference between gambling and trading, contract term: dec expiry, contract size: 100I'll start the market: 90 at 110 (in thousands)we'll see where the market goes... and don't forget the market is always right!

ScilabGuru
Posts: 297
Joined: October 16th, 2001, 2:14 pm

### Gambling and trading, what is the difference?

I did not tell that there is no any difference. Of course there is. I try to tell that the gambling is somehow model of trade where all probability structure is known perfectly. As it was told by Adannenberg there is no model risk here. This is as seems to me the most important point. The other condtions (investor preference, employer/gambler/trader relation) can be changed for gambler to make him exactly as trader.

exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

### Gambling and trading, what is the difference?

Not sure if I agree there. In Vegas, there is also plenty of betting on horseraces, professional sports, where the "odds" are not known exactly by any mortal (except the boxer who accepted a bribe to throw the match), and even slot machines are not transparent in their odds to the gambler. Even the guy who sits at all the baseball games and takes exact hit statistics faces quite a bit of model risk, similar to those faced by the managers in Michael Lewis's Moneyball.How can we answer the difference between someone who bets on the snowfall in Central park on http://www.tradesports.com versus a trader of weather futures? It seems that the underlying and the openness of its probabilities is not enough to differentiate the two activities...

ScilabGuru
Posts: 297
Joined: October 16th, 2001, 2:14 pm

### Gambling and trading, what is the difference?

Yep, I agree, that it is too strong to say that we know all structure with parameters in the gambling, but at least the number of states is finite and the structure is known (parameters are not if this is not the simplest gambling). The number of explanatory factors is also countable.

exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

### Gambling and trading, what is the difference?

Comparably so, though. The states of the payoff of a bond are also finite (bondholders receive 100, or 99.99, or 99.98, ... or 50.26, ... each with a discrete probability).I woudn't say the factors in a horserace are necessarily more countable than the factors affecting AAA commercial paper. In both trading and gambling there are simpler and more complex cases, payoffs, probabilities, and clarity of information. I don't play slots, especially now that they have gotten so computerized and complex, but still play poker, craps, baccarat, and other games that are more transparent.To me, a more important dimension is "why"? I go to Vegas, Atlantic City, Monte Carlo, Copenhagen, or Macau for fun and entertainment, and expect to lose my "cost of entertainment". When I trade an option, I am spotting a risk that I have an advantage in bearing relative to my counterparty, and expect to make money on average.

ScilabGuru
Posts: 297
Joined: October 16th, 2001, 2:14 pm

### Gambling and trading, what is the difference?

I heard a rumor that abouit a year ago Pentagon wanted to open an exchange on political events. (To find Ben Laden, Saddam, president elections, etc). It was refused by Congress(??, not sure by whom) due to ethical and probably some other reasons.

Alphabet
Posts: 119
Joined: April 1st, 2003, 11:34 am

### Gambling and trading, what is the difference?

exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm