Gambling vs. the Stock Market

A very rich man seems to think we should empirically test the proposition that the stock market trading floor is just the world's biggest casino, reports the New York Post:

Mark Cuban, the outspoken billionaire owner of the NBA's Dallas Mavericks, is planning to start a hedge fund that will gamble investors' cash.

Literally.

Cuban believes gambling -- as in slot machines, blackjack, poker and sports betting -- holds just as much promise for returns as stock-market or bond investing, which he claims is rife with misinformation.
……
Cuban, pointing to the wealth of information on professional sports teams, said the professional gamblers he would hire would know more about those games than brokers and investors knew about scandal-scarred companies like Tyco or Enron.

Cuban announced this plan on his blog; no sign yet whether it's just blowing controversial smoke, or something he really intends to do.

Comments

[Dynamist]

Part of the return of securities investing represents the actual value created by the underlying businesses. Sports or slots create no underlying value.

The juice on bets is generally larger than the transaction costs on securities. The difference is increases with the size of investment.

Both areas are somewhat corrupt, but there are more legal checks on securites fraud than sports fraud.

A person (or group) with emotional control and statistical reasoning must do better through securities in the long run.

Good luck!

[Steve]

I'm not sure I agree with Dynamist that there are more checks on the securities market than there are on legal sports gambling.

But here's the reason Cuban is screwed: it's not whether his professional gamblers know more about sports than stock analysts know about the market. Of course they do. The question is, do they know more about sports than the oddsmakers at the casinos? That's a tough proposition.

[SixSigma]

Hmmm, first off the idea does show some semblance of intelligence for market forces which have more to do with emotional premises than anyone wants to admit.

To beign with, in order to play the stock market correctly, you play the bets everyone else is going to play, just play them earlier than most. And playing the bets everyone else does, doesn't necessarily mean you're playing the best company.

A few examples are easy, but the most recent is that no one believes Google is worth 28 billion, but according to the stock price they are because people keep buying it.... (Amazon another)

As for odds, it's basically the same argument. The odds constantly change due to amounts that are being bet, not due to who might win/lose.

When the odds are first set, it is an attempt to even the playing field so to speak, but those odds are constantly revolving due only to amount of money bet and not the best team.

The reason is obvious, Vegas makes money on the bet itself (10%) regardless of whether the person wins or loses. In order to make sure they clear as close to 10% as possible, they change the odds to keep the money for each side's bet even. So the odds flucuate based on the amount of money bet on either side and nothing else.

So if the odds are set for a Tyson victory over Holyfield 3 - 1, and betting sky rockets for Tyson, the odds will move to Tyson 4-1 or 5-1 to encourage more money to move toward Holyfield regardless of who might win or lose.

The theory on both of these premises is that if enough "smart" players are in the pool, then the odds/stock price will truly reflect the "real" odds/company value.

BTW - This is the same theory used in futures markets as well.

And it's used as a common theory in voting - which is to say that the uniformed voters cancel each other out, while the informed minority actually make a difference.

I won't begin to explain what's wrong with this theory of uninformed cancelling, but will say that I don't see anything inherently different from betting on sports and stocks if one pays enough attention to make wise chioces.

Of course that's just rubbing two synapses together, and they might be misfiring.

[*]

How about roulette?

Go 00!

[Rick Barton]

In equities and derivatives markets there is much information that makes accurate prediction more likely over many different time ranges. Even technical analysis (stock charts) alone is helpful. Gambling provides nothing like the information that is available about the markets.

[Phil]

Rick,

You forgot to mention Israel's brutal occupation of Palestinian territories.

Phil

[Colin]

in most financial markets, there is an expectation of a positive return. You add up the return on the entire market: its positive.

Gambling is a zero-sum game at best... and given fees and other costs, on average everyone loses money (excepting the people providing the service.)

Even your basic strategies are different... in financial markets you are always looking to minimize volatility, for a given level of returns. In gambling you need to get some money out on the table; give yourself a chance to win some money. You need some volatility if you want to earn money.

You would have to be insane to 'invest' in something like this... its just another set of fees that reduce any potential earnings even lower. and you aren't even getting comps and free drinks!

[Ayatollah Usoe]

...or maybe he just read The Onion? Lead off headline is "New Social Security Plan Allows Workers To Put Portion Of Earnings On Favorite Team"

[Umbriel]

While there's no equivalent to technical analysis for casino gambling, analysis of sports teams would seem to be comparable, as Cuban implies.

While gambling offers no direct equivalent to investment in equities or hard assets, it seems quite similar to investment in options, and maybe even high yield ("junk") debt. There are hedge funds that specialize in the trading of both.

Interestingly, there is even apparently a fair amount of arbitraging that goes on in gambling:
http://economics.about.com/cs/finance/a/arbitrage.htm
A fund that could find bookmakers which whom it could arbitrage for an extended period (and that might be difficult, because bookies resent the activity, and try to squelch it if they detect it) would indeed have a pretty reliable cash cow.

[joe]

"The question is, do they know more about sports than the oddsmakers at the casinos?"

Since the odds/point spread are based on the bets received from bettors, Cuban's professional gamblers don't have to know more than the oddsmakers, just more than the general public.

[Jason Ligon]

There is little difference between churning investments in a portfolio and betting on sports. There is quite a bit of difference between long term investing and betting on sports.

There is no equivalent to riding the growth of the economy as a whole in sports betting.

Oh, Colin already said that ...

[Rick Barton]

Phil at 09:07 AM,

I post about oodles of different topics. Just google me up. If I told pretty lies about the Israeli government's occupation of Palestinian land instead of writing what I do, I believe that you wouldn't have bothered with your comment.

To bring this back closer to topic, there are a number of wonderful Hi-tech companies located in Israel, which are traded on NASDAQ.

[Safire-bot]

So how are they going to keep this fund any more or less transparent than the others? It seems to me that if the advantage to the fund is that they can gather better information about the teams than Wall Street people can about companies, then the gambling fund will only be worthwhile as long as they can keep it honest.

Well, good luck on that. Smoke 'em if you got 'em.

[Douglas Fletcher]

Hey, that was me. Just an honest mistake.

[Neb Okla]

The latest edition of Reason (1.05 p48) has an interesting article about the 60th anniversary of Hayeks book "The Road to Serfdom" which was reccomended reading in my marketing class.

In the article they discuss the modern economic notion that markets work because prices contain information that is impossible to share in other ways - mainly because the information is so subtle and personal. The kind of stuff one-to-one marketers would LOVE to know.

Gambling could never contain such information because it's not based on the decisions of humans. And sports betting could only contain this information if the players were somehow providing feedback to other betters on whether or not they felt a win was imminent and other such factors. For that to work, you'd need to allow players to bet when they were on the field.

If the theory that markets work because prices contain information that is too subtle to obtain by other means, then sports and gambling as investments will never match the markets in terms of profit potential. It would be an interesting experiment to monitor.

[db]

Wouldn't the exorbitant income tax rates on gambling winnings make this prohibitively expensive? I'd think that would represent a huge overhead for the fund. I wonder if it could really come close to informed investing in stocks in profitability for that reason.

[Rick Barton]

It seems that sports betting, while not nearly as rich in useful information as the financial markets, is still somewhat better than simple odds gambling.

[Jeremy]

I have some comments on this over at my blog.

[TWC]

DB, true enough, taxes on gambling winnings are ordinary income and are taxed at whatever your own marginal rate of tax is. For most of us it would be 28% or 31% federal. But, you are permitted to deduct gambling losses against gambling winnings to the extent of the winnings. That is helpful to the average Joe (sorry Joe) but not as helpful to those who are gambling pros. OTOH, lots of people who are good at the stock market are day traders and they face the same tax treatment as people who gamble well. IE, it's short term gain and can be offset by cap losses, but they don't get cap gain treatment for the net gain. On the third hand, most people I come in contact with that try to play Big Shot Day Trader lose their shorts and come home with their proverbial tail between their legs, hat in hand, and all that. For those folks I think the gambling analogy is more applicable than for those who are in it for the long haul as Jason and Colin pointed out.

[Gilbert Martin]

"Cuban believes gambling -- as in slot machines, blackjack, poker and sports betting -- holds just as much promise for returns as stock-market or bond investing, which he claims is rife with misinformation."

I'll believe that Cuban believes that when I see that he's transferred his entire net worth out of stocks and bonds and into his gambler's hedge fund.

[Rick Barton]

Jeremy,

Nice blog, nice links.

[pigwiggle]

I'm in, sounds like fun.

[Kevin Carson]

A couple of years ago, I heard one analyst on the radio who pointed out that had investors taken the money they put into Enron stock, used it to buy beer, and then recycled the cans, they'd have wound up with more money. His advice: "Get out of the stock market and start drinking heavily."

[TWC]

First time I saw the handle 'Dynamist' I thought Virginia Postrel had started posting here. VBG

[Jon H]

"...or maybe he just read The Onion? Lead off headline is "New Social Security Plan Allows Workers To Put Portion Of Earnings On Favorite Team"

Oh my. That gives me a scary thought.

I wonder how long the team owners will take to come up with the idea of letting people "invest" their retirement money in newly constructed stadiums...

[mark]

Actually there is the equivalent of technical analysis for roulette wheels - the electronic display of past winning numbers that most casinos have next to the wheel.

[great]

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