Gambling versus Stock Market Speculation – Some Observations

While on my business trip in Cambodia, I visited a casino in the evenings to observe the psychology and behaviour of gamblers. Most of the casinos in Cambodia are “unregulated”, in that there are no strict guidelines on minimum age (I saw a kid running around in the premises, much to the chagrin of the staff) and no laws governing any “deposit” to be paid. Thus, one could just come and go as they please and observe the actions of the players within the casino. After reading about the casino-like behaviour of stock market punters and speculators, I was admittedly curious about whether there truly were any observable similarities.

It is interesting to observe that a lot of what happens in casinos (whether large or small) is similar. People will (alternately) get wildly excited or extremely pessimistic and depressed, mirroring Mr. Market’s mood swings. By observing the Baccarat table (which incidentally was played with electronic cards and not real physical cards), I was able to see that some men wagered more than a few thousand US$ on one bet, only to have it all blown down the drain. When these people won a few hundred back on the next hand, they became wildly excited and high-fived everyone around them. These are the people who will probably remember their wins rather than their losses. This is quite similar to stock market punters and speculators who usually prefer to talk about their winnings rather than their losses.

People who stay longer in a casino also have a higher tendency to lose, in what is called the “house advantage”. Apparently, the machines, mechanisms and reward systems in the casino are designed to give them an advantage over the long-term, meaning that if you bet consistently then on average you are going to lose out. I do not have the exact statistics for how much you lose per dollar of bet but it can be pretty alarming ! Similarly, stock market speculators who stay too long to enjoy the “party” are also subject to the “house advantage” which is reserved for professional traders. These institutional traders have access to real-time live pricing using powerful terminals and enjoy close to zero commission and brokerage fees when they trade at lightning speed. The average retail investor is thus severely disadvantaged by this, and long-term investing is a way to “beat the house at its own game” as you would smooth out the volatility.

Another prevalent attitude is the tendency for people to form patterns due to observable phenomenon. This was the most interesting observation of all, I would say ! By observing people playing roulette, I noticed that the number “22” had appeared three times in a row; thus prompting punters to predict that the next roll should be “22” or at least an even number. The reality, of course, is that the next number is totally RANDOM; but the lesson here is that people tend to seek patterns and form ideas on how things should turn out because our minds seek familiarity. Compare this to technical analysts who seek to find patterns in historical price data in order to predict future trends. As far as researchers have said, these patterns are similar to a random walk but nevertheless, legions of people keep trying to read the future direction of the market from charts and graphs anyway. The fact that most have failed is the reason why value investing can be so successful anyway.

Thus, to sum it up, the behaviour I have observed in a casino closely mirrors the frantic buy and sell activities seen in stock market rallies and crashes. The punter (speculator) is the one who tends to lose out the most eventually, as he cannot control his emotions and lets frequent over-trading erode any possible gains he makes (through commissions and other frictional costs). It would be wise to learn from the casino (and upcoming IR) in that: the house advantage is always there, if you are so confident of beating it, then you can try, but 95% of traders lose money in the long run.