Investing, Trading and Gambling – Risk, Strategy, and the Art of Decision-Making

Posted by Harry Kane on Wednesday, October 4, 2023

At first glance, the differences between investing and gambling may seem numerous and far-reaching. After all, the former is considered as the strategic and calculated pursuit of wealth, whereas the latter tends to be discussed in terms of games of chance such as online slots, compulsive behaviour and the inability to manage risk.

However, there’s more nuance here than meets the eye, with both investing and gambling sharing common threads that can teach invaluable lessons to those involved. Such nuances become even more evident when you factor in practices such as financial trading, which is a subset of investment that’s far more speculative and tends to focus on derivatives rather than corporeal assets.

In this article, we’re going to explore investing, trading and gambling in a little more detail, with regards to their core differences and the things that bind them. We’ll also consider the impact of components like strategy, determinism and psychology, which can inform decision making across all practices and help you to make the most of your cash!

What do we Mean by Investing, Trading and Gambling?

Let’s start with the basics, as it’s important to understand the core definition of the terms and practices referenced above before we explore the relationship that exists between them. Here’s our take on investment, trading and gambling, with a particular focus on their differences and similarities.

#1. What is Investment?

Investment requires you to leverage secure stores of wealth in the pursuit of long-term gains. The most common assets that embody this practice are real estate, dividend stocks and bonds, with the latter two instruments comprising the majority of investor portfolios (although the precise allocation of funds will vary depending on your circumstances). When you invest in such assets, you’ll tend to hold them for a specified period of time, with a view to earning incremental profits or cashing them in once their core value has appreciated.

#2. What is Financial Trading?

The purpose of financial trading is to target flexible and short-term gains, usually through the process of buying and selling derivatives speculatively. Common assets of this type include forex (international currency trading) and futures, which enable you to leverage short-term price shifts and market volatility to your advantage by eschewing the need to physically own assets or financial

instruments. Forex traders will use strategies such as scalping and day trading to achieve incremental but frequent profits, without ever putting themselves at the mercy of market volatility or changeable conditions.

#3. Gambling

Although the practice of gambling is synonymous with games of chance and compulsive behaviour, it’s actually far more nuanced and varied than people believe. For example, while online slots and roulette see their outcomes dictated by chance and represent classic forms of gambling, poker and blackjack introduce elements of psychology and strategic thinking to help players improve their chances of winning and minimise loss over time. With such practices, the lines between investing, trading and gambling can become blurred, and embracing this can actually help you to maximise your profits.

The Core Similarities Between These Practices

The descriptions above highlight some of the differences between investment, trading and gambling, especially in terms of assets, strategy and the primary objectives of individuals who engage in such practices. But what concepts unite these practices, and why is it important to understand them? Here are some examples to keep in mind!

The Notion of Risk Management

Let’s start with risk management, which is a staple of both investing and gambling. More specifically, effective risk management enables individuals across all practices to assess, mitigate, and (in some instances) embrace risk to safely achieve their overall financial objectives. Here’s a breakdown of the core elements of effective risk management in investing, financial trading and gambling.

Calculated Risk Taking

One area in which the best gamblers tend to excel is calculated risk taking. More specifically, gamblers who have a track record of success tend to have mastered the art of risking their bankroll while maintaining a clear understanding of the odds and the implied probability of potential outcomes. This is particularly true in the case of sports betting, poker and blackjack, where basic mathematic and numeracy skills can help to calculate risk in real-time. For their part, investors will assess the risk-return profile of their portfolio and real-time asset allocation, based on an instrument’s expected value and the potential impact of forecasted market conditions.

Bankroll Management

The management of money is also key to investing, trading and gambling, especially in terms of setting affordable limits, minimising borrowing or leverage and calculating specific commitments in relation to their potential returns. In the case of gambling and sports betting, for example, a basic strategy sees you minimise your stake values when backing statistically less likely outcomes, as this helps to reduce the risk of loss without overly compromising on returns. Conversely, betting units can be multiplied when backing short-priced favourites, as they’ll have a statistically higher chance of winning but the subsequent returns will be reduced.

Emotional Control and Regulation

Whether you invest or gamble your hard-earned cash, it’s crucial that you do so with a sense of determinism and an appreciation of the underlying rules that govern change or outcomes. This can help you to manage your capital and control your emotions, while hopefully avoiding impulsive decisions that are synonymous with larger and more frequent losses. Gamblers can benefit from this mindset by adhering to a chosen betting strategy and avoiding the temptation to chase losses (or seek out patterns in random results), while investors can leverage discipline to maintain their rationality in the marketplace and ensure decisions are based on tangible factors. We’ll touch a little more later on in this blog post!

The Art of Strategic Thinking

Strategy and strategic thinking are also key elements of investing, financial trading and gambling. More specifically, each of these disciplines can be managed more effectively through the development and application of relevant strategies, which may seek to minimise the risk of loss while optimising potential returns. Here are some key considerations:

Odds, Implied Probability and Risk/Reward

Most potential outcomes in life could be ascribed odds, which would reflect how likely they are to occur. This is certainly true in the case sports betting and casino wagering, where potential events are ascribed fixed odds that reflect both their implied probability and the return you can expect on your stake. These factors should inform your stake amount and precisely how you wager, while the equivalent rule in the world of investment would see you manage your financial commitment and leverage in relation to each asset’s unique risk/reward profile in the prevailing market conditions.

Asset/Game Selection

In the world of investment, it’s usually recommended that you build a diverse portfolio that contains a range of variable asset classes. The theory here is simple; as this strategy minimises your market exposure and risk of loss in real-time, while it also enables you to earn incremental and sustained returns in different market conditions. On a similar note, online gamblers should give consideration to the range of games and verticals that they play, and there are two key reasons for this. Firstly, this lets you select games (or betting markets) with viable bet ranges and variance levels that suits your appetite for risk. Secondly, different games make variable contributions to any wagering requirements you have to fulfil, which in turn dictates how much you’ll have to spend to unlock winnings associated with specific bonuses.

Betting Strategy to Cap Losses

We’ve already touched on bankroll management as a key element of risk control, while the cultivation of an effective betting strategy is central to this. Generally speaking, this strategy requires you to set an initial betting unit, which usually has a relatively low value. You can retain this as your minimum bet level and increase it incrementally according to different and preset rules, whether these relate to positive or negative progression, odds or your wider appetite for risk (or a combination of these factors). This effectively enables you to split your bankroll effectively and between as many potential outcomes as possible, as this is a good rule for investors to heed in 2023.

Psychology and Understanding Fallacies

Last, but by no means least, we come to importance of psychology and the role that rules and fallacies can play in determining your ultimate success or failure. In both gambling and investing, the core psychology of decision-making plays a crucial role in determining outcomes, while identifying potential cognitive biases and emotional responses that undermine rational thinking.

The Gamblers’ Fallacy

The classic gamblers’ fallacy is best explained by a coin toss. In this instance, it describes a mistaken belief that if a single coin is tossed 10 times, this will deliver an equal distribution of outcomes in terms of heads and tails. However, the outcome of each individual toss is statistically independent to another, so you’re just as likely to land 10 successive tails as you are five tails and five heads. This fallacy is repeated across numerous gambling verticals too, especially games like online roulette where players try to identify patterns and random winning sequences. This type of cognitive bias can undermine both gamblers and investors, while causing them to believe that they have more control or knowledge than they actually do.

Chasing Winnings or Losses

Loss is a fundamental part of gambling, trading and investment, although the associated risks are noticeably higher in the case of the first two practices. Games of chance deliver winning and losing outcomes at random, for example, while up to 84% of retail trading accounts lose money when investing in CFDs or derivatives such as forex. The key here is to accept the inevitably of loss while creating strategies that minimise your exposure to risk, rather than emotively chasing losses by subsequently increasing your financial commitment or taking unnecessary risks. Discipline and focus are key here, as is an ability to deal proactively with high emotion or negativity as such feelings occur.

Recognising Loss Aversion

On the other side of the coin, risk aversion describes a common psychological concept where afflicted individuals fear losses more than they value equivalent gains or potential returns. This can apply to both investors and online gamblers, who may miss out on potentially lucrative opportunities due to an unwillingness to engage or risk their capital. However, it’s important to remember that you must embrace the risk of loss in order to pursue returns, with gamblers using strategic bankroll management and betting systems to achieve a balanced and non-emotional approach. As for investors and traders, they deploy so-called “stop losses” to automatically close positions once they’ve incurred a predetermined level of loss. This naturally safeguards your capital, while ensuring that loss aversion doesn’t become a key element of your psychology as an investor.

The Bottom Line

As we can see, investing and gambling differ in many respects, while the latter arguably has more in common with speculative financial trading (which is a subset of investing and commonly associated with assets such as forex).

However, there are also many similarities and concepts that bind these practices, creating a series of invaluable lessons that investors can learn from gamblers and vice-versa. Many of these pertain to capital and risk management, strategic thinking and a core understanding of psychology, each of which will play a significant role in shaping your decision-making processes.

This also helps to cast gambling in a more favourable light, with some facets and genres of remote sports betting and casino wagering enabling punters to reduce their real-time risk while simultaneously pursuing more reliable returns.