Sometimes, it's obvious when someone is gambling. If you were to walk into a Las Vegas casino and put a quarter in a slot machine, anyone who saw you would know what you were doing, and there wouldn't be any reasonable explanation for calling it anything other than gambling. The same thing holds true with certain other casino games like roulette or even a friendly wager on the local football game with a buddy. For plenty of people, gambling is just a way to have fun. But when this sort of gambling becomes a problem for people, it's fairly easy to tell from their behavior that gambling has gone beyond being just a form of harmless entertainment.
Then again, there are some things people do that don't immediately register as gambling, although sometimes that's exactly what they're doing. For instance, when people invest in the stock market, you don't automatically assume they're just gambling with their investment. Without knowing the reasons why they choose the investments they buy, they could easily be following a strategy that they have thoroughly considered and planned, much as a studied poker player would. On the other hand, the stock market can also act as a tool for gamblers to conceal potentially destructive behavior behind a veil of respectable conduct.
Taking risk
Of course, if your definition of gambling is broad enough, then nearly anything you do is a gamble. Most actions involve some degree of risk, and even if that risk is negligible, there's always a chance that some bad result will occur.
However, one aspect of the personality of the typical gambler stands out as an economically relevant characteristic. Most people tend to avoid unnecessary risk. For instance, if there are two strategies that you can follow, one of which is certain to let you reach your goal, and the other of which has a 50% chance of allowing you to succeed, most people will almost certainly pick the sure thing because it doesn't involve any risk. Even when people voluntarily assume risk, they tend to do so because they expect to receive some type of reward as a result, such as an increase in their expected return on investment.
Problem gamblers, on the other hand, actively seek out risk. They'll willingly and eagerly spend money for opportunities to multiply their bets even when the odds are overwhelmingly against them. Despite the fact that they may understand quite well the mathematics of why their behavior is economically irrational, they nevertheless continue to act in the same manner.
Identifying a problem stock gambler
In considering whether someone is using the stock market as a gambling device rather than as an investment tool, you have to draw analogies between other types of gambling and identify similar behaviors. For example, Gamblers Anonymous, an organization geared toward helping gamblers, gives a list of questions to help decide whether you or someone you know may have a gambling problem. In the context of stock trading, not all of these questions apply, but many of the basic concepts expressed in the questions are useful.
Many of the telltale signs of a potential gambling problem can be seen in stock trading. For example, those who find themselves making stock trades in the hope of raising quick cash to solve financial problems or pay back debts may have a problem. Someone who feels compelled to spend a great deal of time at work to check the prices on stocks isn't likely to invest in a healthy way. Often, compulsive stock traders who have profitable trades increase their trading activity in the hope of making even more profits, while those who lose on a trade also increase their trading activity in an effort to make back their losses. To increase the magnitude of their potential gains, compulsive traders often use margin accounts and other forms of leverage that increases the level of risk they take. Facing the prospect of uncertainty and possible losses, problem stock traders may have trouble sleeping at night, and those who fail at stock trading often feel depressed or even consider other forms of self-destructive behavior.
Nevertheless, the stock market gives compulsive gamblers a defense against those who confront them. Because successful investing involves a degree of skill, it's easier for a compulsive gambler to hide behind an apparently coherent strategy that seems rational. And because even successful investors lose money from time to time, compulsive gamblers can avoid appearing out of control until a substantial amount of damage has already been done.
Solving the problem
Unfortunately, even if you succeed in identifying them in the first place, helping people who use the stock market as a way of gambling is difficult. While the usual solution to addictive behavior involves complete avoidance of the activity, it's harder to avoid activity that's a necessary part of managing your financial affairs than it is to completely avoid optional activities like visiting a casino or having drinks at a bar.
However, there are some things that people can do to lessen the impact of a tendency toward addictive behavior in investing. Using relatively simple strategies under the guidance of a financial advisor can reduce the need for a compulsive gambler to pay constant attention to investment-related activities. If, for example, a basic asset allocation strategy involves investing a fixed percentage of their money among a stock index exchange-traded fund like the Vanguard Total Market ETF
Gambling and investing don't mix, but successful investors often resemble lucky gamblers. However, just as the odds usually catch up with casino gamblers in the long run, those who use the stock market as a gambling tool rarely end up as winners.
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- Psych Yourself Out -- and Start Profiting
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Fool contributor Dan Caplinger keeps his gambling in the poker room where it belongs. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is a sure thing.
