Gambling in the stock market is increasing, with most traders losing money while generating billions of dollars per year for brokerages and wholesalers. Will all this trading lead to big market swoons?
Topics covered include:
- Why sports gambling has grown so much
- How gambling in the stock market is measured, and how prevalent is it
- Why most traders lose money but continue to trade anyway
- How uninformed traders improve market liquidity and encourage trading by informed trading
- Why being an asset allocator is more rewarding and as intellectually stimulating as trading
Show Notes
America’s Sports Betting Boom by Felix Richter—Statista
Day Trading for a Living? by Fernando Chague, Rodrigo De-Losso, Bruno Giovannetti—SSRN
Computer based trading system and methodology utilizing supply and demand analysis—Google Patents
Amateurs Pile Into 24-Hour Options: ‘It’s Just Gambling’ by Gunjan Banerji—The Wall Street Journal
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Related Episodes
482: Unlocking the Power of Positive Skewness: Strategies for Investing, Business, and Creativity
239: How to Be a Successful Trader
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 486. It’s titled “How Retail Traders Lose Big While Enriching Wall Street.”
Playing the Stock Market
Recently on the Money for the Rest of Us Plus community forum—this is our premium membership site where we teach investing—a member posted “I recently saw a blurb in Bloomberg News that said Americans are playing the stock market in record numbers, with almost three in five investing in stocks.”
The article goes on to say that baby boomers on average began investing in stocks when they were 35, while the average age that Gen Z-ers start investing in the market is 19. The article pointed out that sports betting has exploded and said that stocks are now also a part of the gambling mentality in our country.
The member wanted to know if this was true. What academic studies are there, that discuss this? Is it only confined to meme stocks, or does it involve all stocks? The member continued, “It sounds like a recipe for a stock market meltdown, or at least increased volatility. Yet it seems like in recent years the market has been less volatile. Should long-term investors be wary of the trend?” That’s what we’re going to take a look at in today’s episode.
The Rise in Sports Betting
Let’s start with sports betting. In 2018 the US Supreme Court struck down the Professional and Amateur Sports Protection Act, known as PASPA. That act effectively banned sports betting in the US since 1992. The Supreme Court determined that the original law did not specifically say that sports gaming was a federal crime for individuals. Rather the law sought to direct the state legislatures to limit sports betting.
The Supreme Court said the Constitution confers upon Congress the power to regulate individuals, not states. And since PASPA was trying to regulate the states or direct state legislatures, it wasn’t constitutional. It’s been five years then since sports betting has been legal in US states. If we look at the total gross gaming revenue in 2019, it was $0.9 billion. Last year 2023, $10.9 billion. Americans wagered $120 billion on legal sports betting in 2023.
Investing, Speculating, and Gambling
Now, it’s fairly straightforward to measure how large sports betting has got, because we can measure how much was wagered in gambling, at a casino. It’s all tracked. But the stock market and other investment markets are not gambling domains; they’re for investing.
Although we’ve talked for years about the difference between investing, speculating, and gambling—it’s one of the core principles that we introduce in our email series for the insider’s guide, we talk about it on Asset Camp. Investing is something with a positive expected return. Typically, there could be cashflow involved. Dividends, interest. Speculation—there’s a disagreement on what the rate of return will be, or even the price. And gambling is something with an expected negative return.
Positive Skewness
Long-term investing in the stock market is an investment. It has a positive expected return. Yet there are some securities, some stocks and options which are more lottery-like. They have a negative expected return. These investments have a positively skewed payoff. So the overall expectation is a negative return, yet there’s that small probability of winning big.
We discussed positive skewness in episode 482, and we defined it as where the average outcome, the average return for let’s say the stock market or an investment is higher than the median or middle return because there are extreme outcomes that pull up the average. But a gamble would have an element of that positive skewness.
Very few would win big, but their winnings are not enough to bring the average outcome, or even the median outcome into positive territory. These are high-risk, high-reward speculations. And the reality is because there’s a demand for these lottery-like payoffs, that can push up the price; investors, speculators are willing to pay more for the opportunity to win big, even though it has a negative risk-adjusted return in the long run.
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