One of the questions I am most asked by my students and the media alike is whether trading on the stock market is a genuine form of gambling. That might sound a simple question, but it all comes down to what definition of gambling you are using. My own view on gambling is that it boils down to the staking of money (or something of financial value) on a future event. When I first started my research into gambling back in the mid-1980s, there were four fundamental types of gambling:
• Gaming – Staking of money during a game (e.g. slot machines, roulette, blackjack, etc.)
• Lotteries – The distribution of money by lot (e.g. National Lottery)
• Speculation – Staking money on stock markets (e.g., investment in shares, day trading, etc.)
In a previous blog I briefly examined whether stock market speculation was a legitimate form of gambling. However, back in the 1980s, psychologists were only interested in studying the first three of these activities (i.e., gaming, betting and lotteries). Although a few academics accepted 'speculation' as a true form of gambling, the majority of researchers in the gambling studies field did not (including me). The prevailing view at the time was that ‘speculation’ was viewed as involving a fair amount of skill and/or relied on ‘insider information’ and therefore was not a legitimate form of gambling compared to other forms of gambling. Although there were clearly accepted forms of gambling that had skilful elements (e.g., poker, blackjack), academic psychologists still rejected speculation as a form of gambling worth investigating.
However, this all changed after the introduction of spread betting. I argued in a number of articles at the end of the 1990s that spread betting had taken the mechanics of stock market trading and applied it to sporting events. For me, this was a game changer in terms of studying the psychology of gambling. No longer could we say that speculation shouldn’t be studied because spread betting was clearly a form of speculation and it was something that appealed to a new type of gambler because it involved sporting events that many people think they know a lot about.
There was also one other key factor in changing psychologist’s perceptions of speculation as gambling – the ‘Nick Leeson effect’. In 1995, Leeson single-handedly brought down the UK’s oldest investment bank (Barings). Leeson was a derivatives broker whose fraudulent gambling caused the spectacular collapse of one of the UK’s most established financial institutions. From the early 1990s, Leeson made countless speculative (and unauthorised) gambles on the stock market that at first made large profits for his employers. However, as with most gamblers, his ‘beginner’s luck’ soon ran out and he started to lose huge amounts of money. Leeson’s losses eventually reached £827 million. Leeson’s psychology and behaviour was identical to that of a problem gambler (except he was gambling with much larger amounts of money and with someone else’s money).
There was perhaps another reason why speculation was seen as psychologically different from gaming, betting and lotteries. Unlike these other forms of gambling, speculation is a type of gambling where the gambler does not know how much they are going to win or lose on the gamble. If I put £1000 on a horse to win the Grand National or on black to come up on a roulette wheel, I know that losing will cost me £1000. On most stock market trades or spread bets, no-one knows beforehand what the losses could be. However, there are financial trades that could perhaps be argued to be more like betting than speculation. For instance, binary options look as though they are going to grow in popularity over the next year or two as the gambling payoff is more traditional than usual financial trading.
In binary option betting, a cash-or-nothing binary option will pay a fixed amount of money if the option traded on expires in-the-money (i.e., it is a simple ‘win-or-lose’ bet as the potential return it offers is certain and known before the purchase is made). One of the attractions of binary options is that they can be bought on virtually any financial product and can be bought in both up and down directions of trade. The simplicity is likely to attract more people especially if they feel they know something about the product being traded upon. This is the same reason why spread betting took off in such a big way because people feel they know about the market (e.g., football) that they are betting on, even if there is a huge element of chance (which there invariably is). My guess is that most people who work in the financial markets don’t see binary options as an investment opportunity – they see it for what it really is – a pure gamble.
References and further reading
Griffiths, M.D. (1991). 'Gambling and Speculation: A Theory, History, and a Future of some Human Decisions' by R. Brenner and G.A. Brenner. Journal of Economic Psychology, 12, 197-201.
Griffiths, M.D. (1998). Gambling into the Millenium: Issues of concern and potential concern. GamCare News, 3, 4.
Griffiths, M.D. (2000). Day trading: Another possible gambling addiction? GamCare News, 8, 13-14.
Griffiths, M.D. (2006). An overview of pathological gambling. In T. Plante (Ed.), Mental Disorders of the New Millennium. Vol. I: Behavioral Issues (pp. 73-98). New York: Greenwood.
Griffiths, M.D. (2007). Gambling Addiction and its Treatment Within the NHS. London: British Medical Association.
Griffiths, M.D. & Auer, M. (2013). The irrelevancy of game-type in the acquisition, development and maintenance of problem gambling. Frontiers in Psychology, 3, 621. doi: 10.3389/fpsyg.2012.00621.
Griffiths, M.D. (2013). Financial trading as a form of gambling. i-Gaming Business Affiliate, April/May, 40.