Many people think investing is gambling. They see many similarities between investment vs gambling. What do you personally think? Let us dive into this topic to see their similarities and differences and try to answer whether or not investing is gambling.
Investment vs Gambling: How are they similar?
Both investing and gambling involve taking risks on your initial capital with the expectation of a positive return. As we go through later, one of the main differences between investment vs gambling is the amount of risk you take. Gambling tends to be high-risk while investing tends to be lower risk. However, they both involve taking risks.
What is Gambling?
Gambling is expecting a positive return when the expected return of your investment is less than your initial principal. Due to this uneven risk-reward ratio, you will need to take a higher risk to get a positive return. The odds are 50/50 or against you. In other words, statistically, you will lose money as you keep gambling over a long period.
If you buy a lottery, you may win a few times but lose most of the time. Over the long term, you will likely lose your money.
Examples of gambling are buying a lottery, playing roulette, buying meme stocks without knowing why, blindly buying 0DTE/OTM options, etc.
How about Investing?
In investing, the expected return is higher than your initial capital. Therefore, you can take a much smaller risk. The odds are in your favor. Statistically, you will earn a positive return if you keep investing over a long period.
When investing, your performance may vary across different investments, but overall, and over the long term, you are more likely to get a positive return. You can achieve this performance by acquiring assets that appreciate over a long period.
Examples of investing are buying real estate, stocks, business, etc. In the short term, your real estate or stock price may decrease, but the price likely increases over time.
Investment vs Gambling: The Differences
To understand more about how investment vs gambling differs, let us break these differences into several key points below.
The Expected Value or the Odds
In gambling, the expected value is lower than your initial capital. Thus the odds are against you. You can win here and there, but if you keep gambling, you will likely lose your money.
In investing, the expected return is higher than your initial capital. The odds are in your favor. You can lose here and there, but if you keep investing, you will likely get a positive result in the long run.
Risk Level
In gambling, you usually have to take a higher risk to get a positive return to compensate for the lower odds. These uneven odds are one of the reasons why gambling is associated with higher risk.
In investing, because the odds are already in your favor, you can afford to take a much smaller risk and achieve a positive outcome.
Influence on the Outcome
When gambling, you have no or limited impact on your outcome. Some gambling games, such as poker, involve skills and strategies; thus, having them may influence your performance. But in most cases, the outcome is determined purely by chance.
When investing, you can affect your performance by doing research, analysis, and risk management. Investors who have the skill to analyze undervalued businesses will have a significant edge in the market and thus can significantly influence their performance. You can increase the odds in your favor. On the flip side, if you do not do proper research & analysis, your odds could be random without you even realizing it. Or, in other words, you could be gambling.
Time Horizon
When gambling, you usually expect the result quickly. If you buy a lottery, you want the result within days.
When investing, the time horizon is usually much longer, starting from months to years and decades. The longer you invest, the higher the chance of a positive return. You increase your odds by staying invested for the long term.
Who Wins?
In gambling, if one wins, the others lose. Eventually, all players lose, and the house wins over the long term. It is just a terrible proposition for the players.
When investing, everybody wins over the long term. This is another crucial characteristic that most people do not realize when comparing investment vs gambling. The fact that everybody can win when investing is what separates it from gambling.
So, Is Investing Gambling?
As we have outlined the similarity and differences between investment vs gambling, it would be safe to say that the two are not the same. We do not believe investing is gambling. That said, some instruments may look like investments but can be considered gambling, ex: binary options, 0DTE OTM options, etc.
Gambling can give you a cheap thrill or entertainment. But if you want to build long-term wealth, your better bet is to invest.
| Gambling | Investing | |
| Expected return | Negative | Positive |
| Risk level | Higher risk | Lower risk |
| Influence on the outcome | No or limited | Yes |
| Time horizon | Short term | Long term |
| Who wins? | House | Everyone |
| What for | Entertainment | Building wealth |
Before investing, make sure you are aware of these differences, and you can ask yourself: Am I gambling or investing?
