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The financial sector is professional gambling in action

The financial services industry is nothing more than gambling, dressed up in the ‘professional’ clothing of business.
Substituting betting jargon for finance-speak makes the reality become clearer; the majority of actions in the finance sector are bets. Picture: Shutterstock

The American journalist and poet Ambrose Bierce wrote in his 1906 satire The Devil’s Dictionary that “the gambling known as business looks with severe disfavour on the business known as gambling”.

That phrase has a particular ring of truth about it when one starts to think about the “casino banking” that caused the financial crisis almost ten years ago. But that term was – and still is – a slur on casinos. If the financial services industry was as well-regulated and as well understood as the gambling industry, the financial collapse may have been avoided.

At the root of all financial bubbles, scams and scandals is the self-proclaimed “professionalism” of the financial sector – what Nobel Prize-winning economist Freidrick von Hayek referred to as “the pretence of knowledge”.

Portrait of Friedrich von Hayek. Wikipedia


Professionalism and distraction

Von Hayek admitted to the futility of trying to make economics “scientific” in the accepted sense of the word. Like any profession, the financial sector seeks to clothe its “pretence of knowledge” in the language it uses to distract its customers from recognising that it is simply an arm of the gambling industry. Substitute betting jargon for finance-speak and the reality becomes clearer. The majority of actions in the finance sector are bets.

The finance sector has a vested interest in dissociating itself from the gambling industry itself. In his book, The Poker Face of Wall Street, finance expert Aaron Brown said:

Gambling lies at the heart of economic ideas and institutions, no matter how uncomfortable many people in the financial industry are with the idea.

Indeed, in the immediate aftermath of Tulipmania (the manic buying of tulips and the ridiculous prices they achieved in the mid 17th-century Netherlands) the courts refused to rule in favour of sellers trying to enforce contracts for sale on the grounds that it was a “gambling operation”.

Bluffing and confidence

Not only are the games of finance and gambling incredibly alike but the skill sets are virtually identical, too. Skills that define successful traders, such as a cold-blooded approach toward risk, speedy decision-making under pressure, discipline and a well-trained memory, are the same ones that separate elite poker players from the rest. Brandon Adams, a professional card player who has also taught a class in behavioural finance at Harvard, argued that some of the best traders are professional online card players.

Two of the key elements of gambling – bullying and bluffing – are the subjects of recent research by Nobel Laureate, Robert Shiller. In his book, Phishing for Phools, he delivers a fundamental challenge to the efficient market (EMT) theorists who claim that you “can’t beat the market” by arguing that as long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception.

Central to any manipulation and deception is the role played by confidence and its dangerous partner, overconfidence. In another book, Animal Spirits, Shiller proposed five key psychological factors – the most important of which is confidence (or lack of it) in the economy and one’s personal place in it. The problem is that while confidence is essential to raise the billions needed to fuel modern industry, it is also an essential tool with which to fool naïve investors.

Financial advisors – or “tipsters” in gambling vernacular – understand that confidence is the key to gaining a customer’s trust. Tipsters, financial advisors, wealth managers, fund managers – all understand and depend on our basic need to trust each other, and them.

Advisors, tipsters and trust

Professor of Economics Paul Seabright believes that the need to trust has evolved in the modern economy to such a point that “people give complete strangers sums of money they would not dream of entrusting to their next door neighbours”. They do this because “professionals” have acquired prestige, power and wealth by “owning” knowledge and expertise and then selling it. This creates a dependency and a “pretence of knowledge”, Seabright says. As such, the customer believes in the expertise of the “professional” without question.

But once the language becomes real and “advisors” are recognised as “tipsters”, then the transactions become demystified. These financial “tipsters” want you to give them your money to bet with. They want to charge you a “management” fee to bet with your money then they want a percentage of any profit made on that bet. If the bet loses then that is, of course, down to you.

The ConversationIf people understand that this is what they are buying and they choose to listen to other people gambling with their money (on horses, football or stocks and shares) then so be it. But many people who gamble just don’t get it and that is what is dangerous. As long as the financial sector is not understood for what it is – “the gambling known as business” – then financial scams and banking scandals will continue.

Chris Brady, Co-Director, Centre for Sports Business, University of Salford

This article was originally published on The Conversation. Read the original article.

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Brilliant and very true observations.

Gambling is in EVERY sphere of your daily life – whether you are aware of it or not.

From choosing your spouse, taking medical advice, or voting for a political party, it’s ALL a gamble!

The trick, as the article implies, is to explicitly recognise there is NEVER any certainty, and become practised at reducing the odds in your favour.

This is a lifelong endeavour.

The lucky few pick it up quite quickly, but the vast majority struggle through life blissfully unaware that this is actually how the system of life really works.

This stuff should be taught at school and drummed into your kids heads from Day One – instead of useless algebra and arcane sentence analysis.

Yes, the products offered by the broad financial services sector such as all forms of insurance cover, investing hard earned money in listed shares, ETF’s, unit trusts, pension plans, etc. is mostly a gamble. Similarly the gamble also applies to making an investment in property, vintage cars, etc. It all depends on an unsure future outcome. How long will you live, will your car be involved in an accident, will the asset class, company or property grow in value, will there be a future demand for the stuff you have invested in, what will the buying power of money be in the far distant future, etc?

The gamble of investing is not the big issue. The problem lies in the financial services industry charging exorbitant fees and profit sharing charges for its creative gambling services.

Take unit trusts as a simple example (which is just a pool of listed shares , listed REITS, or listed bonds / gilts wrapped in a product vehicle and which all forms the basis for financial investment products such as endowment policies, retirement annuities, savings plans, pension fund schemes, etc). If you are lucky with the gamble and you earn a gross return on investment over a prolonged period of say an average of 12% per annum, and the average of the total fees applicable to your unit trust investment amounts conservatively to 3% per annum, it means that the financial services industry has made a 25% margin per annum out of your investment return and that is criminal.

The question is what other alternative gambles are available for the man in the street to securely save for a rainy day, for old age or to leave something behind for his loved ones?

Yes, even if you are the corner shop, or any shop for that matter, there is always an element of “gambling” involved. If i order 200 bags of tomatoes instead of 100, will i sell them all, or have to throw 50 away? If I rather order 100 instead of 200 will i sell out and then have upset customers who take their business elsewhere?

It’s a process of trying to quantify your objective and the associated risks of not achieving that, and then having action plans for various scenarios. Its the same for going to battle, driving down the road, (when you think about that, all that it preventing that oncoming truck hurtling towards you at 100km/h from driving into you is a line painted on the road, and your belief that the driver will stay on his side of the road…), or almost any business endevour.
The only time there is 100% certainty is when there is some form of cheating/corruption to ensure a pre-defined outcome.

It all depends on time-frame. If long-term investment is gambling, then it is a sure bet, because inflation is a given. The longer-term rise in the value of the indexes is the result of increasing credit-extension, so rising markets are basically guaranteed by Reserve Banks. The only reason for the existence of any Reserve Bank is to protect the value of the collateral held by the banking system. They have got only one tool in their toolbox to reach this goal and that is inflation. So, longer-term investing is a sure bet.

When you shorten in investment horizon, and throw in some gearing, then things become interesting. Now you turn a sure bet into a probabilities game that is heavily stacked against you. The amount of leverage used, determines the extent to which the odds are stacked against you. The trader who can solve this riddle finds himself in charge of a money-printing machine. Maybe one percent of prospective traders are successful at this attempt. The rest lose all their capital, and most who enter this casino lose everything within the first year.

The successful trader is the one who manages to harness the probabilities and risks, to get the odds in his favour. Although trading and gambling is exactly the same thing, the successful trader puts himself in the position of the “house”, because the odds are in his favour. Gambling is a sure bet if you are the house or the gambling institution. Just look at the size of the buildings and the amount of money in Las Vegas.

So this brings us to the logical conclusion, that both investing and trading is only a gamble if you don’t know what you are doing.

Japanese equities since 1989?

Inflation is not a sure bet, you are thinking in the classical positive inflationary seance, Japan?

There is some Interesting stats to that statement of long term bets/predictions being more accurate, however not in all systems long term bets be better.

Controlling for inflation, real equity returns in Japan have been negative since 1989

I got in a really a bad situation recently when i invested almost my life saving with Mr. Whiteman Creed the investment broker who “helped” in investing my money totaling the sum of $90,500 into 6 acccounts. I wasn’t allowed to make my withdrawals and they jammed the system in such a way to frustrate we their clients but thanks to sokolov.swiftrecovery(at)gmail(dot)com who has been recovered almost 90% of my money and qll i dropped was proof that i had a transactions such as this and i didn’t get anything out of it. Never lose hope!

Yes it is so, but in financial markets it is possible to put the odds in your favor, more so than going to a casino. One example is having the knowledge that a country with higher inflation’s currency will decrease compared to a country with lower inflation in the long run. With this knowledge you can buy rand hedge shares over the long run especially at a time when the rand has strengthened a lot to put the odds even more in your favor. Still not a sure thing, but the probability to make money in a few years time is way more in your favor than walking into Silver Star and putting it all on red… Combine this type of knowledge with the knowledge of diversification and other theories and your odds improve even more…

A smart professional financial gambler understands that that to buy the Casino’s shares instead of going to the casino as a customer puts the odds in your favor as a gambler in unprecedented ways.

Yet another Moneyweb article having a go at the financial industry. Yes there is risk involved, if there is no or little risk you invest in 3m US treasury bills and earn 1.7%.

Equity being the riskiest asset class you should probably look at 12 -15% over the long term. The difference is called the risk premium.

That is why your pay-off on winning the lottery is so great because your risk (probability of losing your R2) is so great.

Terrible article that essentially advocates socialism. Brilliant Moneyweb. I have said it before but you really know how to sh#t where you eat.

Shame clearly struck some cord/discord there..

Capitalism let loose is just as bad as socialism, the future is somewhere in between.

Africa certainly doesn’t need more players driving the great wealth divide further..

I do not think the article says, “do not invest”. It says that investing is a lot like gambling, no certainties, odds etc. Also recognize the industry for what it truly is. Gambling is not limited to the financial industry also affects other areas.

Excellent article – insightful & accurate. Key point: At the root of all financial bubbles, scams and scandals is the self-proclaimed “professionalism” or “the pretense of knowledge”. Most of the investment industry is driven by salesmanship (the pretense of knowing which fund/stock to buy today, then a different one tomorrow and new funds launched monthly etc.). Sadly, people think they are dealing with stewards ie. institutions/people that have the clients interest at heart when they are mostly dealing with salesman. If you deal with a steward you get their single best view that is based on consistent principles over time. If you deal with salesman you get options, which change over time, mostly based on what worked in the recent past (rear view mirrow investing). As the Harvard prof says, any information edge a trader/fund manager may have is so small when measured against the costs they incur (trading costs, bid-offer spreads, fund expenses).

Business by itself is a gamble.

I well thought out plan and strategy that can be monitored, reviewed and changed to fit changes in your lives and situations, give you the best chance of winning.

The pretence of knowledge…mmh that is an interesting notion

End of comments.

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