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Derivatives and the Future's Game: The Ethics of Gambling and Investment
MadCaddy
Registered User regular
Registered User regular
I thought I'd start a thread about something that I think about day to day, and see what you all think. I've often wondered what the threshold for individuals are with regards to something being an 'investment', and something being 'gambling'. The line has been blurry for as long as laws have been written to control it, hence the loopholes that're so often exploited, and the avalanche of legal table gaming outlets sprouting up across the nation. It seems that gambling becomes an investment for every state, when their coffers get low. Even states that have gambling legal already try to broaden their market by keeping up with the joneses (New Jersey's fight to legalize sports betting, New York's upcoming vote for table games.)
This makes me wonder what sort of threshold seems fair to differentiate immoral gambling from righteous investment? In a knowledge based economy, is gambling's inherent unfairness to the ignorant any different than any other businesses profit generating edge? With the legalization of exchange wagering in some states, the 'loose' reading of the RICO act the horse racing industry received to enable interstate pool mingling, and be able to compete internationally, it seems more and more that the current laws are untenable for any resemblance of fairness, and are instead used for protectionist initiatives by certain lobbies that have figured out their angle, and are desperately trying to maintain their edge in a non-competitive marketplace.
I intend to flesh this out a bit more, but wanted to see if there was interest in this topic, and I wanted to share a video that speaks a bit about how intrinsic 'gambling' is in our boom and bust world, and has been so since ancient times.
http://youtu.be/fg-QA6JPwLQ
This makes me wonder what sort of threshold seems fair to differentiate immoral gambling from righteous investment? In a knowledge based economy, is gambling's inherent unfairness to the ignorant any different than any other businesses profit generating edge? With the legalization of exchange wagering in some states, the 'loose' reading of the RICO act the horse racing industry received to enable interstate pool mingling, and be able to compete internationally, it seems more and more that the current laws are untenable for any resemblance of fairness, and are instead used for protectionist initiatives by certain lobbies that have figured out their angle, and are desperately trying to maintain their edge in a non-competitive marketplace.
I intend to flesh this out a bit more, but wanted to see if there was interest in this topic, and I wanted to share a video that speaks a bit about how intrinsic 'gambling' is in our boom and bust world, and has been so since ancient times.
http://youtu.be/fg-QA6JPwLQ 0
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There's nothing inherently wrong wrong or "unfair" or "immoral" about speculation necessarily, although at some point the financial instruments involved can be so obscure as to essentially become a con (as we saw recently in the U.S. banking industry.)
or are we talking about like, actual gambling?
that's why we call it the struggle, you're supposed to sweat
Please define actual gambling, and how that couldn't be made into a derivative, that's kinda what I'm after.
And according to that definition the Chicago Mercantile Exchange is a house of? The IEM? What changes speculation into gambling?
speculators in an actual financial market serve a variety of functions, like distributing risk or providing liquidity.
both involve the 'players' assume risk so I guess they're similar in that sense, but otherwise I'm not sure what's useful about comparing them
that's why we call it the struggle, you're supposed to sweat
I'll have to write my more thorough write up with links, and what not that should clear up some of the issues we're having. I'm just asking what makes the difference between the gambling (which you admit both do) is moral in one sense, and immoral and degenerative in the other and thus should be illegal understand the nuances and pros for both, and dabble in both professionally, I just don't understand why one should be illegal and the other not.
I'd also like to know how you define the two biggest futures/commodity markets as far as the amount of "gambling" involved, as I've grown quite disconcerted by the amount of similarities between the two.
that's why we call it the struggle, you're supposed to sweat
But for whom? Who should be receiving the value? And to what level of certainty does something need to be before it isn't considered a gamble? Risk is a constant in this world, and every individual dictates a certain amount of it. It seems like the current patchwork of laws w/r/t "gambling" is set up just to ensure that the government can choose the winners and losers. Gambling has been privatized, and traded in the US since before Vegas, and some of the earliest tycoons of Wall St were heavily involved in gambling (and still are), and it's the "commodity" aspect that has kept Horse Racing (and wagering on it) legal in almost every state.
that's why we call it the struggle, you're supposed to sweat
Define the risk that needs to be assuaged for ones risk to be just. People are allowed to choose what they pay for a variety of forms of entertainment/commodities/services, I just don't understand what makes gambling taboo in one sense, and not in the other.
Firstly, should gambling be legal or not? I say sure. The US has very restrictive gambling laws, but the UK, for example, is doing fine with having betting shops on every street, and people betting on tomorrow's weather, election results, or anything they please. Of course you need limits, as gambling can also ruin lives. Age limits, social acceptance (it's easier to notice addiction and other problems when the activity isn't taboo) and making sure organized crime don't use it for laundering, for example. Gambling shouldn't be taboo.
Secondly, you've got 'is gambling the same as investing' and I'd say no. Gambling is a past-time, with no purpose other than entertainment. Investment is the core of the economy, and provides numerous benefits to society, based on the idea that wealth is created when an asset is moved from a low-value use (cash sitting in my bank account) to a high-valued one (allowing you to start up your own franchise of Snakes and Lattes). Even a socialist like me hunks investment has massive social positives, although I can't say I'm sure about derivatives - I am not sure what function they fulfill in society except perhaps making capitalists richer, although I welcome someone like @ronya teaching me their usefulness.
Basically, gambling is an entertainment that you can make money from if you're very good at it or very lucky. Investing is a basic economic activity that you can make money from if you're very good at it or very lucky.
I agree that the thread is multi-layered, and I tried to distinguish that by the keywords, but this is the sort of conversation I was interested in. I feel that you've kinda contradicted yourself with the middle, and then the end, and I also wonder why you can't invest in entertainment? I disagree with your statement that gambling has no benefits to a society on multiple levels. There's the Keynesian angle, and then one of the things that jumped out at me was: Why are fund managers better than your typical gambler? Is it just because they can afford it, and got other people to believe they knew better? Gambling is innate in our world. Whether it's planting crops, fishing, mining, or social engineering/rhetoric, people make risk/reward calculations and "gamble" every minute of their lives.
Gambling is when you buy or sell with your own expectation of the return on your entire portfolio being negative.
Investment is when you buy or sell with the expectation of return on the entire portfolios of both you and your seller being positive - where both walk away with a gain. This can result from zero-sum bets because people start with risks.
Take a weather derivative, which is (more or less) a bet on the weather. The bet itself is zero-sum: if the seller is right about the weather, then you were wrong about it. But you might have some risk to adverse weather, in the physical form of a farm and its varying output, for example. And you may find the risk of enormous losses (and bankruptcy, etc.) much worse than the risk of smaller profits. So by betting for adverse weather, you can completely remove the possibility of being utterly obliterated by cold snap, and so you are better off even though the bet is zero-sum.
And that is the role of derivatives - people have different levels of risk that they can afford to take, and derivatives let them pay each other to move it around. If you've ever contemplated a fixed-rate versus adjustable-rate mortgage, that is a derivative bundled with the loan.
That leaves arbitrage, which is where you buy or sell with the expectation that the other guy will lose out, but the other guy disagrees. The line between arbitrage and gambling is a little more fine.
Now, with exceptions for exploitation, fraud, cheating, etc. I don't understand how legally one form of it is legal, while another is not as I don't believe there's any form of licensing to trade derivatives... I'm not keyed into the largest markets, and wanted to do a better write up if there was enough interest.
Another key part of the equation, re: derivatives, or arbitrage algorithms is the protected markets. Now, I'll freely admit to being a very laissezz faire capitalist, but I also believe in a certain level of transparency that all these things lack.
As far as gambling, there's an inherent amount of it in any derivative because derivatives are ranges, and can have abnormalities, or just be flat out incorrect. I've never heard gambling defined by law as inherently negative-EV, and even I find it hard not to call poker gambling, even though it's clearly a game of skill (most forms), part of the skill is figuring out the equation.
I think you're kinda squashing things together and confusing things. Yes, everyone takes risks all the time, which is like gambling, but we were talking about actual gambling - poker and craps and roulette and the horses and so on. It does the conversation no good if you put everything together instead of separating them out.
Equally, investing was meaning investing capital in a business or financial product to make money. Yes, you could say that gambling is a kind of investment, since you can make money, but that's not what we were trying to discuss. And yes, you can invest your money in a casino, but that's not gambling.
So, basically, in these kinds of discussion, you need to define terms clearly and find what is similar and different between different terms to compare them. Otherwise, the conversation becomes a horrible mess.
As for benefit to society, I meant does gambling provide benefits to society beyond its value as entertainment? Compared to watching TV or playing lacrosse. If you disagree on multiple levels, I think you need to explain them.
@ronya Excellent explanation.
If you can prove it, then it's just a misrepresentation tort, I believe. I am not a lawyer, but I think it is already illegal as matter of bog-standard common law.
Right but at the outskirts you find "investments" that are little more than gambling. Even more fundamentally, you can realise that the percentages and numbers people use to calculate are based on educated guesses of the future. The issue is whether it is in our interest to let those who control our wealth to invest that wealth in the riskiest investements while we act like they're not risky.
Betting and investing both are about huge gains and smaller losses. The problem is that we can't trust people to not be affected by that and act cautiously. If man was not prone to overestimating benefit and underestimating loss we wouldn't have gamblers.
You did not read my post.
How about this: it's investment if you are paid to take on risk. It's gambling if you pay to take on risk.
Moving along the risk-return tradeoff curve is considered broadly legit. Consuming risk is considered a luxury activity.
The speculator is "betting" that the price of carrots will be such that he can resell them at a profit once they are grown. He's taking on risk, but with the expectation that his purchase is sound and that he'll make money.
Horses are a commodity. One might buy or sell horses based on their expected future value. "Which horse might win a particular race" is not a commodity.
that's why we call it the struggle, you're supposed to sweat
Actually, arbitrage is risk-free profit due to mispricing. http://en.wikipedia.org/wiki/Arbitrage
The old saying is that arbitrage doesn't exist.
In reality, it regularly exists briefly in small amounts until supply and demand push prices back to a level that eliminates it.
Again, I can agree with that definition, but it's not the American legal definition, and investments can run afoul. I understand the need of hedging, but hedging is a skill much akin to a good bookmaker/poker player. I don't understand why you are trying to bend English, but ventures are a vital part of the capitalistic model, and to say they're riskless isn't very candid. Even the most renown, and established businesses can run afoul, as Kongo Gumi can attest.
Regardless, the current legal system needs reworking in the US, and I'm hopeful about some of the changes being made with regards to the Gambling Industry, but to the topic of derivatives more broadly, I was curious as to what sort of margins for error are encouraged for a fiscal theory. I've heard the Kelly Criterion cited even in fund management, but I'm sure there are more advanced algorithms at the top of the food chain.
I don't know what to tell you if you don't think how many races a Thoroughbred/Quarter horse will win affects it's value... :rotate:
that's why we call it the struggle, you're supposed to sweat
You're trying to lump everything together. For example, a horse can be an investment. A poker-chips company can be too. That doesn't mean gambling and investment is the same.
Ronda's explanation was very good - we're not saying that riskiness is the difference. Riskiness is the similarity.. But as Ronya says, there is an important difference - when you beat me at gambling, I lose and you win. When you invest in my company, I win AND you win. Hopefully.
Edit: I just noticed the autocorrect typo, but I think I'll leave it there.
I'm not sure why any of the bolded is relevant...? It seems as if you feel that legitimate investment must somehow be skill-free to be legitimate? Why so?
Of course capitalist ventures are risky. I did not say they are riskless: to the contrary, they are risky, and therefore the people who undertake them are compensated for taking on that risk. In gambling, on the other hand, one pays to take on risk, in the form of expected net losses to the bookmaker, or to the house, and so forth.
To gamble means to take risk. I understand the point you're making with regards to taking on risk against mitigating it, but that's not the way the world works. By that definition for investment, there wouldn't be restaurants, theater, countless innovations and small businesses. Probability Quants aren't magic. You realize Wynn/MGM are publicly traded companies, right? What of William Hill?
I understand licensing, and I'm not saying that we should have an anarchy. I also understand that they have algorithms that they guard covetously (there was a recent high profile suit filed in the UK, that I was trying to find again.). I don't know why we're arguing over 'to take risk', I was asking what makes a risk just? When? How certain does one need to be to take the risk, and then, how much should they risk? How much leverage should corporate entities be able to obtain, and how to measure this? Or is there always going to be a critical mass where one becomes the new royalty too big to fail?
But having defined gambling as such, I trust it is also then obvious why 'the taking of risk' might not therefore be consistently prohibited. Why should it? It is not risk-taking that we seek to restrict when societies strictly regulate gambling.
But it is several securities, that tank without gambling being legal (and are managing to do so currently by mismanagement and over-saturation now.), but the horse racing thread will be my next one.
I'm just curious as to why some risks are acceptable and others not, and what that threshold is, and why only the largest funds should have access to the most exotic derivative exchanges?
We do, since the banking panics of the late 19th, regulate risk at a macroscopic level. We call this financial and banking regulation. But as you already perceive, what these regulatory structures set out to achieve is quite different.
Your original question was:
Should we regard that as satisfactorily answered?
In any case, yes, certain exchanges are extremely opaque. But, you see, investment is not gambling. It does not set out to be fair amongst its paying thrill-seekers. Its role is to mitigate an opaqueness and riskiness that is intrinsic to the state of nature.
No, you're wrong. There are some good examples in the wiki article I linked.
Take it down a couple notches, hoss.
That's going to happen when people disagree with your fundamental premise.
then why doesn't the other guy set the correct price to begin with
like, you yourself contend that arbitrage achieves a market price adjustment process
for arbitrage trades to happen at all, people have to disagree on the equilibrating market price