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apine
Posts: 410
Joined: July 14th, 2002, 3:00 am

Gambling and trading, what is the difference?

February 4th, 2004, 8:47 pm

i think that tradesports is both, as they have contracts on the price of gold, stock indices, etc. it appears to me that the difference between gambling and trading is that trading is based on economic activity/value. at least some group of people involved in trading are trying to interact with the economy in some way. that might be a refinery hedging oil risk, a person purchasing stocks to track his retirement with the economy & inflation, and a firm raising debt to fund operations.thoughts?
 
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Lucetios
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Gambling and trading, what is the difference?

February 5th, 2004, 5:29 pm

The distinction between a gambling and a trading instrument is defined by the comission of the region responsible for the inforcement of the commodity or secusities act of that region. In the US it is SEC and in Ontario, Canada, for example, it is OSC. They all use the same critaria for this distinction: - Can it be used to hedge against a financial risk?. The key word is "financial risk", and the degree of the distinction is how efficient is this hedge?Just because an instrument is very popular is not enough of reason to be traded in an exchange. It should satisfy the above requirement also.
 
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exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

Gambling and trading, what is the difference?

April 12th, 2004, 9:27 pm

The distinction is subjective with several shades of grey, and in my opinion, is more a statis of connotation rather than any difference in the underlying activity.Take an NCAA coach, whose job, income, career prospects and other dimension of financial well being are tied to the performance of his team. If he goes in an alley and bets against his team, so that his financial well-being is hedged against the team's win or loss, would you say he "traded" an asset negatively correlated with his portfolio, or that he was gambling, and a wrong bettor at that?Is someone who chooses to buy a Ginnie Mae over a T-bond, enticed by the higher return, not essentially "betting" that interest rates won't fall further or that ideosyncratic prepayments will leave them high and dry?The whole idea of trading is that it increases happiness in some way for both parties. When I go to the bar and get a martini, the bartender is happy to have my sawbuck, and I am happy with my Bombay Sapphire and blue-cheese stuffed olives. Similarly, when I go to a craps table and bet the don't pass/don't come, I am trading an expected loss for casino entertainment, free drinks, and the right to gloat when a "7" is rolled.A gamble is simply a game with a random outcome. Buying a stock whose return you do not know is a bet that the stock's return will reward you for the risk, and also hedges the "financial risk" of the market growing faster than your wealth (basically locking in your proportion of the world's wealth in some statistical way). Right now I can't think of a gamble that is not also a trade, but there are many trades that are not so much thought of as gambles, like paying off your tax liability (OK, maybe so).
 
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cvz
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Joined: January 7th, 2003, 9:20 pm

Gambling and trading, what is the difference?

April 13th, 2004, 1:26 pm

QuoteOriginally posted by: LucetiosJust because an instrument is very popular is not enough of reason to be traded in an exchange. It should satisfy the above requirement also.Why not? I would argue that more harm is done in prohibiting specific types of trading than allowing it carte blanche. Moral considerations aside, how confident are we that regulators, or anyone for that matter, understand the potential of an instrument for risk transfer/reduction? Perhaps anecdotes exist of traded instruments which caused more harm than good; but there is no way to quantify the potential benefit of those which are prohibited which would have caused more good than harm. Though the semi-borderless internet may be changing this (again, cf. tradesports.)Absent a compelling, specfic reason to believe otherwise, I always assume markets are smarter than the comittees who regulate them.
 
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exotiq
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Gambling and trading, what is the difference?

April 20th, 2004, 1:35 pm

In support of cvz's last point, does anyone understand why it makes sense to have any laws probiting gambling, since anyone opposed to it can simply choose not to gamble?Those laws seem a bit contractory because of the following logic:1.) Politicians may argue that much trading (e.g. derivatives) are gambling2.) They are gambling because the markets are efficient enough to give options zero NPV3.) Markets are efficient because smart people would take away any positive NPV trade available immediately4.) ...yet they are not smart enough to decide what is a gamble?When a pension fund manager can't hedge a portfolio with Treasure STRIPS because those are considered derivatives, it breaks my heart.
 
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apine
Posts: 410
Joined: July 14th, 2002, 3:00 am

Gambling and trading, what is the difference?

April 20th, 2004, 3:56 pm

the argument for prohibiting gambling is that it is deemed to have a negative impact on those who choose to not gamble. as an extreme example ofsuch an argument (i.e., not to make the two equivalent), is to say "anyone opposed to driving drunk can simply choose not to drive intoxicated." but as we know, driving under the influence impacts more people than the simply the driver. likewise, the argument goes that gambling: 1) can be addictive (i would not consider this a medical condition, but clearly people have problems), 2) gambling problems can impact whole families 3) gambling houses attract criminals & "businesses" that the mainstream prefer to not have around (e.g., prostitution) making gamblers bad neighbors.i think that most people don't have a problem with occassional gambling. but i don't know of anyone in a rush to buy a primary residence in atlantic city. how many people would like to have a spouse that rushes off every weekend to las vegas to play blackjack? obviously there are differentsituations -- a person that is gambling every weekend well within his/her means is very different than a mother or father risking the rent moneyeach night at the poker table. it is the latter that the law is trying to protect. one could also look at from the standpoint that most gambling isis done as a negative expectation game. therefore the authorities are trying to protect the consumers. of course, they are also the source of government lotteries, one of the games with the most negative expectation around.that is my take on why someone would want to prohibit gambling. i would also add that this is also the source of consumer protection in the trading area. when a security is marked up enough, the odds go increasingly against the consumer.
Last edited by apine on April 19th, 2004, 10:00 pm, edited 1 time in total.
 
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DrEvil
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Joined: April 22nd, 2004, 10:17 pm

Gambling and trading, what is the difference?

April 23rd, 2004, 3:17 pm

QuoteOriginally posted by: apinethe argument for prohibiting gambling is that it is deemed to have a negative impact on those who choose to not gamble. as an extreme example ofsuch an argument (i.e., not to make the two equivalent), is to say "anyone opposed to driving drunk can simply choose not to drive intoxicated." but as we know, driving under the influence impacts more people than the simply the driver. likewise, the argument goes that gambling: 1) can be addictive (i would not consider this a medical condition, but clearly people have problems), 2) gambling problems can impact whole families 3) gambling houses attract criminals & "businesses" that the mainstream prefer to not have around (e.g., prostitution) making gamblers bad neighbors.i think that most people don't have a problem with occassional gambling. but i don't know of anyone in a rush to buy a primary residence in atlantic city. how many people would like to have a spouse that rushes off every weekend to las vegas to play blackjack? obviously there are differentsituations -- a person that is gambling every weekend well within his/her means is very different than a mother or father risking the rent moneyeach night at the poker table. it is the latter that the law is trying to protect. one could also look at from the standpoint that most gambling isis done as a negative expectation game. therefore the authorities are trying to protect the consumers. of course, they are also the source of government lotteries, one of the games with the most negative expectation around.that is my take on why someone would want to prohibit gambling. i would also add that this is also the source of consumer protection in the trading area. when a security is marked up enough, the odds go increasingly against the consumer.So if societies are worried about lung cancer, should they outright ban smoking? Should the possible consequence of heart disease and the societal inconviniences of Fat B@$tad and his whole family mean we should have a law prohibiting the sale of food with more than a certain amount of saturated fat? Is the high implied interest rate in a car lease good ground for banning car leases to protect consumers?I've noticed that in countries like the US where the drinking age is high and somewhat enforced, that 20-somethings do not learn to be responsible with alcohol as they do in countries like Germany, where I've seen teenagers buy beer.Strict drunk driving laws do save the lives of those who don't drive drunk, but it is much harder to say the same about prohibitions against more isolated activities like gambling or investing in hedge funds. Don't you agree that it is better that brokers qualify customers before allowing them to trade options rather than having a government ban on trading them?Similarly, do you also notice that the undesirable activities of criminals is stronger in places where the casinos have to go underground? I'm open to there being a counterexample, but I feel far safer walking on the Las Vegas strip at 2:30am than faring down many Manhattan streets at a similar hour.Yes, protect innocent bystanders, but don't prevent adults from willful exchanges with limited externalities. If two people think something's a good deal and want to trade with each other (like in the car lease example), let it be.
 
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apine
Posts: 410
Joined: July 14th, 2002, 3:00 am

Gambling and trading, what is the difference?

April 24th, 2004, 3:08 pm

DrEvil, you have incorrectly read my post. the question was posed "does anyone understand why it makes sense to have laws prohibiting gambling since anyone opposed can simply stop gambling." i think that i answered the question without voicing an opinion on whether gambling should be legal or prohibited. i simply gave reasons one might use to argue for prohibiting gambling.although i can see where you might have drawn the conclusion that i am against gambling, i really don't know where you got the idea that i am against car leases, option trading or hedge fund investing. quite frankly, my livelihood depends on the latter two.
 
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DrEvil
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Joined: April 22nd, 2004, 10:17 pm

Gambling and trading, what is the difference?

April 25th, 2004, 6:37 pm

apine, Don't take it personally, those comments were attacks on silly reasons behind some prohibitions, not against any views you might have. It just shows which side of the seat belt law debate I am on :-PPerhaps taking this a step further though, is there a connection between laws prohibiting gambling and those permitting use of certain types of derivatives, or do the "neighborhood" effects discern them?
 
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ManuLondon
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Joined: April 12th, 2003, 8:43 pm

Gambling and trading, what is the difference?

May 30th, 2004, 1:07 pm

My £0.02 worth:The major differences:- The odds in finance are probably zero to distorted in favor of the trader (e.g. the S&P500 over time is growing), whereas in the casino the house makes it sure to lose in the long term.- The number of games in finance is infinite (there is only a finite number of games in all the casinos of the world), there is bound to be one at least that makes money consistently.- you don't pay commissions to play the casino.Rgrds,Emmanuel
 
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balaji
Posts: 480
Joined: December 20th, 2003, 2:46 pm

Gambling and trading, what is the difference?

June 12th, 2004, 6:30 am

And one doesn't need to know Ito calculus to make money from gambling...
 
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exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

Gambling and trading, what is the difference?

June 14th, 2004, 1:08 am

QuoteOriginally posted by: ManuLondonMy £0.02 worth:The major differences:- The odds in finance are probably zero to distorted in favor of the trader (e.g. the S&P500 over time is growing), whereas in the casino the house makes it sure to lose in the long term.- The number of games in finance is infinite (there is only a finite number of games in all the casinos of the world), there is bound to be one at least that makes money consistently.- you don't pay commissions to play the casino.Rgrds,EmmanuelMy sunday night spot response (I guess that would make it my $0.036284):- While the trader would like to think the odds in finance are in their favor, the whole concept of probability in finance is a concept modelers posit on the markets to try to make sense of outcomes they can't predict. While we would all agree that the more time a pair of dice are rolled that 1/6 of the rolls will sum to 7, few of us would make any similar statement about the returns of the S&P. In fact, many would have said that the odds were against the buyer in late 1999 and early 2000.- In principle, an infinite number of financial games could be described by a mathematician, but the number that ever have or will be played, described, or traded by financial practitioners throughout human history is and will remain finite. A mathematician could also describe an infinite number of casino games, but in both trading rooms and game rooms human activities are limited to the finite.- There are at least two games where the casino charges what it calls a "commission" of 5%: 1.) When you bet with the winning bank in Baccarat, 2.) On a winning buy or lay bet in craps
 
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farmer
Posts: 13462
Joined: December 16th, 2002, 7:09 am

Gambling and trading, what is the difference?

July 21st, 2004, 3:36 pm

Gambling is the unique case in human experience - artificially contrived specifically to create this unique property - where the same action is not likely to lead to the same outcome. In trading, by contrast, what worked yesterday is likely to work again today.If you rolled enough dice - like several billion - you could eventually use the outcomes to map the surface of the craps table, and deduce the mechanics of the human arm and wrist. If you made enough trades, you could make a map of resource and consumption patterns.As a result, the process of trading is a search for positive counterparty combinations - in other words, combinations where you can make money over and over, and yet your counterparty does not go broke. As such, positive sum, survival, and serial correlation are closely related.
 
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exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

Gambling and trading, what is the difference?

July 21st, 2004, 8:13 pm

QuoteOriginally posted by: farmerGambling is the unique case in human experience - artificially contrived specifically to create this unique property - where the same action is not likely to lead to the same outcome. In trading, by contrast, what worked yesterday is likely to work again today.That reminds me of a quote from Dick Feynman's lecture "Symmetry in Physical Laws", where he talks about displacement in time not having an effect on the result of an experiment: "That of course means that if you bought General Motors three months ago, the same thing would happen as if you buy it now."I'm not sure whether I am agreeing or disagreeing with you on this, but odds tend to remain more stationary in casino gaming than trading (actually, I don't believe "odds" per se exist or matter in the real financial world): There is always a 1/6 chance of rolling 7 on the craps table, but the very nature of the markets changes year to year, volatility goes through regimes, bubbles create and dry up liquidity, and the fact that participants discover a pattern in the market changes whether that pattern holds...
 
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exotiq
Posts: 1888
Joined: October 13th, 2003, 3:45 pm

Gambling and trading, what is the difference?

October 1st, 2005, 2:12 pm

To point to some real examples:- Is "spread betting" trading or gambling? It looks like futures trading, but clearly the word "bettting" would keep it from being accepted in the US. Shouldn't the feature that lets you buy a guaranteed stop loss make it look more like trading with a protective put?- What about TradeSports? The "odds" are effectively determined by the price relative to the 0-100 expiration values, does this make them any different from Fed Funds futures?
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