Welcome to our weekly blog post where we discuss matters that we believe would positively impact your business, with key emphasis on the financial aspect.
This week we will tackle a somewhat different type of subject, often raised in discussions but largely misunderstood by many. In this week’s blog post we are going to discuss the differences between investing and gambling — what are the differences and are there any overlaps?
We will be using the following parameters to help us move the discussion along and possibly draw distinctions between the two:
- Planning horizon — the amount of time it takes in-between the initial cash outlay and receiving the expected return;
- Riskiness — the proportionate probability that things do not go as initially planned (resulting in a negative outcome);
- Decision-making method — the type of methodical approach typically taken before the decision process; and lastly,
- The expected return — the anticipated gain associated with the transaction.
Let us explore these criteria in further detail.
1. Planning horizon
Deciding that it’s the right time to put your money to work and indulge in an activity that could possibly earn positive returns, one typically thinks about the length of time required in-between the initial cash outlay and when the returns would be received. This is where we see a large difference between investing and gambling.
Investing typically requires a decent level of patience and planning. Before an investment decision is made, an investor usually weighs their available options against the amount of time required to allow their investment enough time to generate expected gains. On the other hand, gambling usually doesn’t require such a high level of patience and planning as most gambling transactions are relatives short-term and impulsive — unlike investment decisions. Therefore, it is important to note that the anticipated time horizon difference largely differs between investing and gambling.
According to simple google search, the definition of the word ‘gambling’ is “…the wagering of money or something of value (referred to as “the stakes”) on an event with an uncertain outcome, with the primary intent of winning money or material goods.” While the same search engine produces the definition of the word ‘investing’ as to “put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.” By simply reading these two definitions there is already a glaring differentiator, ‘risk!’
Gambling has an inherently significant level of uncertainty attached to it — a wide spectrum of returns that include both strong gains and losses. On the other hand, while it isn’t fully cast-iron, investment returns are more consistent and dependable. Gambling with your money is simply a lot riskier than deciding to put your money to work within an investment that has established a track record of strong performance.
3. Decision-making process
As briefly mentioned above, the decision-making process for gambling is far different from that of investing. Deciding on whether to invest or not typically involves a level of fundamental understanding of what or where it is that you plan to put your money. For example, if you wanted to invest in stocks then you would most likely need to speak with a person that understands the fundamentals of the company’s business & the market in which it operates so that they could best advise you on the type of stock that would suit your risk appetite and expected return. Depending on these parameters, they might advise you to either ‘buy’, ‘sell’ or ‘hold’ particular stocks to achieve your expectations.
Conversely, gambling doesn’t necessarily require a fundamental understanding of the cogs involved in turning out positive returns but rather it begs a significant level of luck in the mix of unpredictable outcomes. Many of times gamblers might think to use historical indicators as a tool for predicting future outcomes but this has proven to be futile in many instances because there is typically little correlation between the two events. Therefore, the decision-making process in investing can be more trusted and reliable than is the case for gambling.
4. The expected return
There exists an inherent relationship between risk and return — a relationship whereby the more risk one takes the more returns one would expect to receive. Consequently, it can be inferred that given that there is more risk involved in gambling than investing, there should also be a possibility of making a higher expected return. And this typically is the case. What seems to be the alluring people to gambling is the possibility of making jaw-dropping, astronomical returns. Investing, On the other hand, doesn’t’ garner such attention in this regards, but has been used by the financially astute investors as a means of growing their wealth — no matter the starting point.
In summary, Investing is overall a better outlook for anyone that wants to make financial gains in the long run, and who is patient enough to see plans manifest over time. Gambling, on the other hand, seems like it provides astronomical returns but it lacks stability and is largely uncertain.
Did we miss anything or maybe you would like to add a comment on this subject? Please let us know your thoughts in the comments section.