The Stock Market and Gambling: Parallels and Differences

Although both gambling and stock market trading involve financial risk, many people associate the two with different activities. Investments like GICs, government or corporate bonds, mutual funds, and blue-chip stocks tend to be considered low risk activities that yield positive expected returns through skill and knowledge-based approaches.

Investing

Gambling offers immediate results; unlike investing which requires longer-term time horizons and patience to bring financial gains.

Researchers have discovered that stock traders exhibit many of the same cognitive traits as gamblers. They tend to overestimate their abilities to predict stock price movements (confirmation bias) and believe their own opinions are reliable and objective.

Furthermore, traders can become addicted to the short-term gains associated with their trading activity and become dependent on its short-term gains for survival. They may engage in risky investments and lose more than they gain; although this in itself may not constitute a problem gambling disorder should trades become problematic; financial speculation should therefore be recognized as a potential risk factor when designing assessment and treatment methods for problematic gambling disorders.

Speculation

The stock market is where buyers and sellers meet to trade stocks. Stocks may be traded on physical exchanges like New York Stock Exchange, or electronic ones like Nasdaq. An expert investor is capable of analyzing an organization or piece of real estate to make informed decisions on its potential return in a reasonable period of time.

Speculation lies somewhere between investing and gambling; it involves risking capital for future profit but often has negative expected value over the long term.

Studies on gambling and investing have identified numerous cognitive similarities, such as overconfidence in their investing abilities, an illusion of knowledge about stock purchase outcomes (confirmation bias), and tending to favor information that supports one’s opinion (such as hot stocks) over information that contradicts it (recognition bias). This evidence indicates that speculative financial activities share similar psychological features as problematic gambling and should be recognized and studied more fully as contributors to problem gambling.

Time-Bound Events

Although many attributes have been used to distinguish gambling, speculation, and investment from one another, most scholars view investment as distinct from gambling on account of its different activities and instruments as well as time frame; it entails lower risks with positive expected returns; increased economic utility; and no particular point at which an asset is staked (unlike gambling).

Investing can take place through different vehicles, including GICs, bonds, mutual funds, exchange-traded funds (ETFs), blue-chip stocks and real estate. Successful investing requires knowledge and study – for instance interpreting stock charts to interpret trading patterns or company earnings reports – as well as dividend payments that provide financial protection and increased returns over the long term compared with gambling (where no such reward exists). Research suggests that problematic speculation and gambling are highly linked.

Behavioral Patterns

Investment and gambling both involve risk-taking with the hope of eventual profit; one major difference between the two activities lies in their duration: gambling is typically short-lived while equity investments can last for decades. Gambling usually has negative expected returns and tends to be compulsive while investing often requires less compulsivity but still demands impulsivity and outcome devaluation compulsivity (see Iowa Gambling Task [IGT], Bechara et al. 1994).

Our research demonstrated that frequent Pay-to-Win game payments significantly predict subsequent gambling behavior and that cumulative spending in Pay-to-Win games was also predictive of gambling behavior. Both these factors are significantly associated with being in the PGSI high-risk group for problematic gambling, suggesting the behavioral economics approach may offer valuable insight for gambling research and harm minimization interventions that aim at understanding heuristics and biases that drive gambling behavior to reduce harmful consequences of it.

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