Games 7 Is trading gambling?

My story of the racetrack (https://appliedmacro.com/2017/07/12/desire-the-fatal-flaw/) is how many people, from outside finance, see my world of traders and hedge fund managers. A bunch of gamblers who, at the mercy of their desires, love the thrill with the outcome largely down to luck.

This is invariably intended to be an insult. While I do not enjoy being insulted, I also find it interesting that it is so poorly directed. As with many insults, there is an element of truth but it says more about the speaker than the target.

Using the previous framework on games, they are suggesting that trading is:

  1. High volatility
  2. Low skill
  3. Motivated by desire for excitement

This is probably a fair representation of how a non-professional might engage in it. It is a very fair description of how I play poker with friends. This is why I think it says a lot about the speaker.

In contrast, I would describe professional trading in the game framework as:

  1. High volatility
  2. High skill
  3. Desire for consistent profits and to minimise excitement

This is also a good description of how a professional poker player would view their play.

For both trading and poker, the experience and motivations of amateurs and professionals are very different.

For a non-participant, the most common error is to assume that high volatility games are low skill ones – which we have already seen is certainly not the case. It is also easy to generalise from the few lucky cases that make a good story, and then mistakenly think that luck is all that matters.

Conclusion

Trading and poker have a lot in common. To some, they can be games with a high degree of randomness, where the motivation for playing is the fun that comes from experiencing the volatility. Or they can be games played by professionals, who want to reduce the volatility as much as possible to focus on the non-random positive earnings they can obtain from it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s