Tuesday, March 29, 2011

Investing or Gambling? Part 7: Profile of a Typical Investor and Gambler

When we first began researching the profiles of typical investors and gamblers, we found many sources describing gamblers but relatively few discussing investors. The information we read about gamblers was written from either the "problem gambler" viewpoint, or that of a "casino operator". The investing articles were written for purposes of attracting "day traders" to discount brokers, or describing why investors typically lose money.

Rather than summarizing this information once again, we decided to explore the underlying traits and skills that both participants exhibit.   

In the old days, we all have images of savvy boardroom executives smoking cigars while formulating important business decisions in a smoke filled boardroom. In contrast, we also envision the small old wiry racetrack bettor studying his racing forms while the cigar ashes threatened to fall off.

Source: Frontier Gamblers - Poker Alice
Today, we find that the cigars have mostly disappeared and that the executives and gamblers have become much much younger.

It appears that youth has overtaken our society.

But not so quick. During the past few years, our economy has faltered, leading to widespread unemployment. Executives and thousands of regular employees have been laid off. Graduates from colleges cannot find jobs in fields of their study. Out of frustration, many of these individuals have turned to gambling or investing in hopes of earning a living to support their families.

From a demographic viewpoint, we find that age has no bearing on the profile of these persons. In Wall Street, the mentality is the younger the better. They believe the younger you are, the more mathematical and abstract you think, the better you will trade. However, the major difference between these individuals and the ordinary person is that they are playing with someone else's money. These young mavericks will earn a very handsome bonus regardless of whether they win or lose.

The illustration below was designed to describe the thinking of various gamblers. However, those involved in investing (or trading their own accounts) are depicted as well.  What we learn is that the average individual  is best described as an entrepreneur. They try to be middle of the road, balancing amusement with gaming while taking average risks. Whereas, individuals and amateurs lean more toward amusement, and elitists take more risk.
Source: Gambling - Contexts and addictions

According to the Forbes article, The Average Investor Is His Own Worst Enemy, average investors fail to succeed because they are overly confident, shortsighted, and have bad timing. The same is true with the average gambler.

What novice investors and gamblers believe is that they are playing on an equal level with all the other participants. Both fail to realize that they are actually playing against highly educated and highly financed professionals. These professionals have more information at there disposal, and know the underlying probabilities by heart. Consider a professional poker player. He knows his probability of winning as each card is drawn while the common individual just thinks in terms of luck. To further complicate the equation, the professionals are playing in teams while the individual is playing alone.

Whether the professionals work independently or for a company, they have dedicated their livelihood to learning their trade. Most began small and have worked their way up the income chain. Most have made associated contacts that help to keep them informed.

If you have dreams to pursue your own career as a professional investor or gambler, be prepared to study, memorize, and practice. Learn to make your own decisions but always consider the advice of others. You must always be retrospective and analyze the plays that succeeded and failed. And, never make reckless decisions, especially out of dispair.

According to Harrah's Gambling Survey 2006, successful gamblers (and we interject investors) believe they are more:
  • in control of their spending and borrowing
  • optimistic about the future
  • prepared financially for retirement
and more likely to:
  • view work as a career
  • research purchases more
  • dine out
  • have higher earnings
than the common investor. If you fit these profiles and are willing to spend years (rather than days) preparing for your future, then you too may become a successful gambler or investor as well.

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