The following definition applies to both investing and gambling: Putting money at risk in the hope of earning more money. In spite of this similarity, society has very different moral views of the two activities.

Develop an argument reconciling the differences and similarities between the two concepts. That is, why do people generally feel good about investing and bad about gambling? (Hint: Think of where the money goes and what part of income we use.)

Describe the difference between investing and gambling by drawing a probability distribution to represent each. (Hint: Think of the expected return and the probability of a big gain or a big loss.)

Practical Finance Is It Investing or Gambling? Investing is putting money at risk in the hope of earning more moneya return. But isn't that also a definition of gambling? Certainly it is, so what's the difference between investing and gambling, and why do we have such different moral and ethical attitudes about them? Investing has economic value to the society that gambling doesn't. But, aside from that, from an individual's perspective, it's fair to ask about the distinction between playing the stock market and taking a trip to Las Vegas. Viewing both processes in terms of the probability distributions of their returns provides some insight. Investing tends to be characterized by probability distributions with positive expected values (means) and relatively small probabilities of very large gains or losses. Gambling, on the other hand, generally has a zero or negative expected value and offers a good chance of losing everything placed at risk. The attraction of gambling is that there's also a visible chance of winning many times the amount risked along with its entertainment value. Think of playing roulette in a Las Vegas casino. It's no secret that the odds are stacked slightly in favor of the house, and that many visitors leave town with empty pockets. But there are also a few well-publicized examples of people who hit the jackpot. Graphically, the distributions might look something like this. Investing Gambling -100% 0% 100% + This view leads to another logical question. Are there activities that people normally call investing that are more like gambling? The answer is a resounding yes. Buying the stock of a high-risk new venture might be an example. There are also some financial markets that are risky to the point of bordering on gambling (e.g., commodities and futures markets, which are beyond the scope of this book). In fact, the whole idea of portfolio theory is to move the investor's exposure toward the investment profile we've just described and away from the gambling profile. The important thing to take away from this discussion is that something isn't investing just because it happens through the financial industry. Brokers like to characterize all their offerings as investing because it has a nobler image. But, in fact, some financial investments are really more like gambles