A card shark in a thousand-dollar Armani suit swaggers into a Vegas casino and lays a huge bet on the outcome of a single spin of a roulette wheel. Miles away, a Wall Street trader in a thousand-dollar Hugo Boss suit struts onto the trading floor and buys up 20,000 shares in a tech startup. Since neither cowboy can see the future, how is the trader’s speculation different from casino gambling? Is there even a difference?

The Gambler

A seasoned gambler would argue that his betting decisions are based entirely on what he calls a “System.” The System has never failed him, and he swears by it. He wins more than he loses, and this is the proof that The System works. The gambler is quick to argue that he has spent a lot of time looking at the angles, the odds, and the possible outcomes of each bet. But regardless of how much time the gambler has spent learning the games and perfecting his system, to gamble is to risk money in a situation where the odds are deliberately stacked against a win for the gambler.

A gambler relies on luck more than skill, though he would rather not admit it. The simple facts are in the statistics. Hitting a single number on a roulette wheel holds 37:1 odds against the gambler. There is a 50% chance of winning a roulette bet placed on red or black. But the payout for winning the latter bet is lower, so a gambler who is ‘feeling lucky’ will wager a large amount on the single number in hopes of winning 35x his money (or whatever a particular casino pays out for a win). There are loads of theories about luck, lucky stars, and what makes a player feel lucky. But luck is not a science, nor can it be proven with statistics or mathematical probability.

Gambling is creating risk for the ‘thrill’ of beating the odds. A gambler isn’t only in it to win it. Studies show that long term gamblers experience a rush even when they lose. While it may be a negative feeling, the buzz is still there, the hook that keeps the gambler coming back for one more bet. A gambling addict isn’t addicted to winning. He is addicted to the thrill involved with the act of gambling. But money is still at the heart of the thrill. Try betting with candy instead of money; that’s a game for children. The greater the risk, the higher amount of the money bet, the greater the reward when it pays off. The down side: failure is all the more devastating when you lose it all.

The Speculator

A speculator conducts research and calculates risk before making a financial transaction. Like the gambler, there is an inherent risk involved in every speculation. The more money the speculator invests in a particular trade (stocks, commodities, or futures), the more money he makes when his speculation pays off. The speculator is fully educated with knowledge of the financial sector and its ups and downs, trends, and bubbles. Knowing exactly when and where to invest is more of a science than a gamble, even though markets are not always certain. Just look at the American Great Depression of the 1920s or the more recent global financial crisis of 2007-2008.

A speculator is a trader for whom making financial investments is a job. A speculator can also make personal speculations and trades for his own stock portfolio on his own time, but a licensed trader acts on behalf of a company (often a brokerage firm). So in essence, trades made on behalf of the firm use other people’s money. A gambler would probably not have the same thrill if he were gambling with other people’s money. In the end, what differentiates a speculator from a gambler is the skill set. Traders have spent a lot of time learning a particular set of skills necessary for them to succeed at their job – or they wouldn’t have one. So while a gambler swears by a particular system, the gambler is really just playing with luck. But sometimes he is just very lucky.

Gambling Systems Explained

Certain systems are available to help gamblers win at the game. While the odds always favor the casino, a certain amount of knowledge will help the gambler develop the skill needed to make smarter gambling choices. Simply stated, these skills make the gambler a better bettor. Using roulette as an example, several roulette systems utilize various strategies designed to improve the odds of winning. Some of these systems are based on studying mathematical probability. While others rely merely on repetition.

The martingale strategy is a popular roulette strategy based on repetition. The strategy is based on the idea of doubling down on 50/50 bets (red/black, even/odds). For each losing bet, you double the bet. Even if you lose several bets in a row, the series of re-doubled bets will become high enough to pay back your original losses. This strategy only works if the gambler has very deep pockets, as true probability suggests that you could just as easily get 30 reds in a row as 30 blacks. Ultimately, this strategy relies on the luck of the spin and the size of the gambler’s pockets.

There are many such systems in play, and each one is just as likely to make you stinking rich or filthy poor. Strategies like the Fibonacci strategy (based on the Fibonacci sequence of numbers) is just as much a fantasy as it is a reality. The numbers are real enough, but the sequence goes from 1 to 144 awfully fast, so betting in the amounts listed in the sequence results in some very high bets in a very short time.

Most ‘strategies’ like the above probably worked for more than five minutes, so the ‘strategist’ put them down on paper. Unfortunately, results which are truly random (as with games of chance) rarely live up to expectations.

A Speculator’s System

There are some maverick traders who have applied the martingale system to trading. Unless that maverick has some very deep pockets—and can buck any trend—the trader is doomed to fail. When a series of investors makes the same illogical investments over and over for long periods, this can affect the value of markets and commodities in the long run, and eventually destroy the system.

A speculator often deals with future trading and foreign exchange trading. He speculates on the shifting price trends and invests accordingly. But the difference between trade speculation and gambling is vast. Speculators crunch a lot of data involving each trade. They examine charts, graphs, and financial forecasts to form an opinion on the viability of an investment. In the case of futures trading, the speculator enters a price contract for a specific commodity. The profit or loss of that commodity for the speculator is determined by the price forecast, the length of the contract, and other factors.

In the end, speculation is a form of gambling, as nobody can see the future. Companies open and close, commodities see shortages and surpluses, and all markets are affected by the activity of the whole group of investors. But unlike the casino gambler, a speculator follows legal regulations for trading and (usually) works within the system. Gamblers follow hunches, systems, or ‘gut feelings’ most of the time. And feelings aren’t facts.

Nick Johnson is a lover of game theory and mathematics. After years as a quant on Wall Street, Nick stepped out of the fast lane to become a stay at home dad and write. After chasing the kids around all day and tucking his little ones in bed, Nick loves to relax playing in online Casinos and is a life-long poker enthusiast.
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