Are You a Gambler or an Investor?

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Are You a Gambler or an Investor?

If you treat your portfolio as a gambling stake instead of a nest egg, the consequences can be dramatic. See where you fall on the investor-gambler spectrum.
By Bob Frick, Senior Editor
From Kiplinger's Personal Finance magazine, July 2011

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John Mowen once had a 2 handicap, a level of accomplishment most amateur golfers can only dream of. But like many seemingly benign pursuits, golf can have a dark side. Mowen admits that about ten years ago he had become so hypercompetitive that the game lost its joy for him and he gave it up. In the same way, investing is a pursuit that can be healthy or unhealthy. Taking an unhealthy approach to investing can slide into gambling and make it a losing proposition. This is a subject that Mowen, a professor in the Spears School of Business at Oklahoma State University and an expert in consumer behavior, has explored in depth. Most recently, he coauthored a paper that examines differences
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between gambling and investing.

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The two aren't as different as you might think. In both cases, you're placing your money in ventures with uncertain outcomes. But the consequences of treating your portfolio as a gambling stake instead of a nest egg are dramatic. Whereas gamblers in the stock market think short term and trade
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a few stocks frequently based on little information, investors understand that the odds tip decisively in their favor if they invest broadly and for the long term. An investor has a greater need for education and information than a gambler, says Mowen.
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"Investors also have a future focus, and to me that's the hallmark of investing." Gamblers often have a penchant for risk-taking, which they find stimulating, Mowen says. In addition, they have a tendency to be more materialistic, impulsive and superstitious. Few of us, however, can be neatly classified as thoughtful and sober or wild-eyed and impulsive. We all fall somewhere along a spectrum that stretches between those extremes, says Frank Murtha, a behavioral-finance consultant with MarketPsych, which offers psychological training and other services to financial professionals.
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Penny for Your Stocks

Another way to approach the investing-as-gambling phenomenon is to consider not only how securities are traded but also which securities are purchased. One class of stocks is a gamble almost by definition. I'm talking, of course, about penny stocks -- those low-priced, high-risk securities for which you'll almost certainly find solicitations as close as your spam folder. In fact, you may be receiving more penny-stock tout sheets than usual. Alok Kumar, a finance professor at the University of Miami, found that the demand for penny stocks increases during tough economic times. Further, Kumar compared behavioral patterns of people who bought lottery tickets with those of people who bought "lotterytype" stocks, or penny stocks. His research showed that those who were predisposed to buy lottery tickets also favored penny stocks. People who spent a lot on both tended to be poor, young African-American or Hispanic men who lived in cities. Investors in the lowest income group, with annual incomes of less than $15,000, lost an average of $4,725 per year on penny stocks -- or about a third of their income. Those with higher annual incomes lost about the same dollar amount in penny stocks -- but their losses were a smaller fraction of their income. Curious to see where you fall on the investor-gambler spectrum? Take a quick quiz devised by Mowen for Kiplinger's. If you tend toward the gambler end and have an urge to take fliers, stick some "mad money" in a separate brokerage account with no more than 5% of your assets, advises Murtha. As a little extra insurance, make sure a third party can monitor the account and nag you if you seem to be going overboard. If, however, you really have an investing-as-gambling addiction, keeping a mad-money account is equivalent to an alcoholic holding onto a bottle of hooch for an occasional drink. In such cases, it would be best to seek professional help.

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Are You a Gambler or an Investor? TOPICS: Investor Psychology

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Are You a Gambler or an Investor?

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