Does Investing = Gambling

There is an interesting piece by Lucy Kellaway on that describes a little-noted population in London’s financial community: compulsive gamblers.


Kellaway writes about brokers who often gamble during work and certainly afterwards and the toll it sometimes takes on lives and marriages.She notes that no one really understands just how wide-spread this problem is since it’s a topic no one, apparently, wants to discuss:

No one knows how many pathological gamblers work in trading rooms. The banks don’t want to talk about it. None of them would be quoted for this article; even the British Bankers’ Association declined to comment on the grounds that “personnel issues” were outside its remit. Most banks deal with gambling addictions in the same half-hearted way that they deal with their employees’ other awkward problems: with an all-purpose, confidential helpline that people can use (but in practice almost never do) to ask for advice.

She then quotes John Coates’ book, “The Hour Between Dog and Wolf” (my review:, which describes the release of dopamine by the brain in response to risk and how that can become an addictive phenomenon.

The  piece is about professional traders/gamblers of course but it made me think about ordinary investors as well. Are they also exhibiting the same behavior when they log into their on-line accounts and take a bet on Apple or Facebook? My initial reaction is not only that they are also also gambling but that they are even more extreme versions of the phenomenon Kellaway describes.

By way of analogy, I will mention that I am an occasional (bad) auto racer who has had the good fortune to see very good, professional drivers at work around a track. Watching a real race car driver operate a car at high-speed is something special, because they show us just how much an ordinary car can do in the right hands. In fact, I leave these events humbled and in the slow lane typically, which brings me back to our topic. Presumably, when these London types gamble, they do so with strong mathematical skills and a solid understanding of the risk-return principles in the gamble. Yes, they take a chance but they do so, I hope, with the same mentality of the racer pushing his car to the limit. When an ordinary investor goes long Apple because he loves is iPad, he is acting much like the average driver who speeds recklessly because happens to love his new Porsche. Both individuals are taking risks without because of (a) over-estimating their own ability and (b) and under-estimating of the odds against them in the risky activity.

As Kellaway notes later on:

Their defining trait is a grossly exaggerated confidence that they are going to make money – something that, in a weaker form, may be a good thing in a trader but in this extreme variety is a disaster. “They have an overinflated perception of their ability,” she says. “They are intelligent and socially skilled. They have high expectations of themselves and if they don’t succeed the consequences of that may lead them to take greater risks.”

That description would apply to a lot of jerks racing on the highway in their expensive cars or to the small investor who made some money on Google and then lost the gains on RIM or Facebook.

In the end, investing gurus like to argue that there is science or technique in what they do, and in many cases there is — much the way there is a lot of technique in racing. But just because someone drives fast does not mean they understand over and under-steer or what an apex is. In those cases, driving fast is gambling with lives, just as investing for most people is simply gambling with money they typically can’t afford to lose when all is said and done.

FT subscribers can read the full piece here:

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