How is investing different from gambling?

Question

Due to the No Arbitrage Principle, in theory, there should always be risk when you invest, however investing is seen as smart common sense which every adult needs to do whereas gambling is a poisonous addiction we need to curb, what’s the difference? To me, it seems that only when the market is exploitable and not fair, is there a true difference, apart from the immediacy of the results of many types of gambles vs the drawn out nature of investments

In: Economics

Answer 1

The main distinction between the two is that when investing, you are actually buying and selling something, a share of a company. When you buy stock, you own a portion of that company. If the company makes a profit, you can be paid out in the form of dividends. If you own enough stock, you get a say in how the company is run.

Whereas with gambling, you only buy a temporary agreement if X happens. I will pay you Y money, with X usually being an event determined largely by chance.

Investing is buying something and hoping to sell it on again at a higher price or earn money by holding assets. Gambling is a game of chance to win money with the odds stacked against you.

The reason that investment and gambling are treated so differently is due to the mathematical principle of expected value or how much value (money) you are expected to fain or lose in a given situation.

For example in a roulette table with 50 red 50 black and 2 green with a 2:1 payout on the correct colour you have a 50/102 or a ≈ 49% chance of doubleing your money but a 52/102 chance of losing your money this means that the expected value is how much you are likely to win 2 × 50/102 ≈ 0.98 minus the amount playing the game cost (1) for a total expected change in value of -0.02 (you are statistically going to loose money)

Where as the expected value for investing is positive, much harder to calculate than a simple casino game, and not all stocks are good investments, but a good investment has a positive expected value which means that on average you will make money rather than lose money.