Can fund managers capture money that is now gambled away?
Investing versus gambling
A clean, though imperfect, distinction between investing and gambling is:
- if the expected return is positive, it is investing
- if the expected return is negative, it is gambling
Other views on gambling versus investing can be found here and here.
An investing view of gambling
I’m not one of those people who believe that playing the lottery is irrational. I think it’s silly, but not irrational. The expected return of the UK national lottery is approximately -54%. But for a mere pound someone gets the dream of extensive wealth. Playing the lottery is no more (and no less) irrational than paying to see a James Bond movie or to read a romance novel.
State-run lotteries are essentially an alternative form of taxation since the profits go to the treasury or to charities. However, they are a very regressive tax — the wealth dream is most compelling to the poor.
Other forms of gambling are even less useful. They are essentially just a mechanism for increasing financial inequality.
A gambling view of investing
If gambling means that you should expect to lose, then why would anyone gamble instead of invest? Investing is boring.
It is boring because:
- results take too long
- big results are out of the picture
The lottery is compelling to so many because of its immediacy. It doesn’t take years. Rather something might happen in a few days. And that something might be big.
An investment lottery
Sales in the UK lottery are about £2.6 billion per year. That’s non-trivial compared to the roughly £80 billion of UK pension contributions per year.
It seems to me that the fund management industry could gain some business (and be socially useful) by creating some products that appeal to gamblers. What I have in mind is something that would have aspects of a lottery but have a positive expected return.
There are premium bonds in the UK, which are along the lines that I’m thinking. However, premium bonds are not very exciting either in their returns, or in their lottery aspect.
Epilogue
Money’s just something you throw
Off the back of a train
from Long Way Home by Tom Waits and Kathleen Brennan
Photo by shuttermon via stock.xchng
Unknown to me when I wrote this post, Freakonomics says that Michigan and Alabama have implemented no-lose lotteries.
Investing can certainly have a negative expected return if it provides a good hedge against priced risks. The definition you quote is very imperfect indeed.
Grant,
Thanks for the comment. Imperfect as my distinction is, I feel compelled to defend it some.
One interpretation of your comment is that your hedge is just one of several things you are doing. I’d want to look at everything as a whole and decide if the expected payoff were positive or negative.
If this hedge is an isolated act, then I would call it insurance, which is the opposite of gambling in the risk dimension rather than the return dimension.
If you look at the two links in the post about investing versus gambling, I think it becomes clear that expressing a very good distinction is going to be hard to come by. Ideas and links are welcome.