"We love to make forecasts, predictions and even wagers about the future
February 19, 2015 8:49 PM   Subscribe

The betting market in Las Vegas isn’t much different from Wall Street. Fed by rumor, speculation and greed, teams, like investments, can grow hot or cold for no good reason. Moving lines is remarkably similar to market bubbles. Walters insists that “[b]etting on a ball game is identical to betting on Wall Street.” Walters even claims that he has lost a lot of money in the markets and thinks the Wall Street “hustle” is far more dangerous than that in Las Vegas. It should be no surprise then that many Wall Streeters have gambling histories, most prominently Ed Thorp. For more information, read Scott Patterson’s excellent book, The Quants. I even know a few.
Gaming The System by Robert P. Seawright posted by the man of twists and turns (13 comments total) 16 users marked this as a favorite
thinks the Wall Street “hustle” is far more dangerous than that in Las Vegas.

The rest of the article is fine, but ...

Standard vig is 10%. As soon as you bet $1 it is worth .90. (I know the article mentions that ... I didn't watch the CBS "hustle" video ...)

And if you win, taxes on gambling income are a lot more than those on capital gains.

Meanwhile, the stock market is bolstered by the millions of employees forced (or strongly strongly encouraged) to put their (de facto) required 401k plans there.

I don't like the stock market either, but it's more of a philosophical objection. If I wanted the best ROI, I'm not that stupid. One of those options is a much MUCH better "bet" (per current rules.)
posted by mrgrimm at 9:00 PM on February 19, 2015 [5 favorites]

If you win more than your documented gambling losses, that profit is taxed as income.

This is an important detail oftentimes missed. More info: http://www.irs.gov/taxtopics/tc419.html
posted by andreaazure at 9:34 PM on February 19, 2015

Do you actually know a serious gambler who thinks winnings aren't taxed? Usually they not only know it, but have taken the trouble to organize a legitimate Schedule C so they can offset winnings with more expenses than the line 21/Schedule A approach allows.
posted by michaelh at 2:05 AM on February 20, 2015

Perhaps he meant "dangerous" in a wider sense than that of the individual player's expected return being lower.
posted by thelonius at 2:29 AM on February 20, 2015

Short term trading - which is the closest analogue to sports gambling has pretty much the same tax regime. With some esoteric exceptions.

I've looked at some of the disclosed results of sports book "sharps" and statistically they don't win at a high enough rate to say they are good at picking winners. Rather what they are good at is controlling risk so their bank roll survives long enough to get lucky again. Of course it wouldn't tale much to convince me the same is true of short-term traders.
posted by JPD at 3:19 AM on February 20, 2015 [4 favorites]

I worked for a year in a financial spread betting company - instead of, say, buying a stock, you bet that the price will go up, and the more it goes up the more you win (or vice versa). In practise it's similar to a CFD or future or other leveraged instrument, but gambling winnings in Ireland are tax free as long as they're not your primary income so it had advantages.

There was a definite gambling thread running through the company - our head of trading used to take a long bathroom break with the newspaper every morning and people would wager a euro on how long he'd be. A guy who did the US markets (and hence worked lunchtime-nighttime) used to come in late and people would bet on when he'd come through the door. The guy in question was a big BetFair (a betting exchange, further blurring the gambling/finance line) user, and used to bet on dogs ("think of them as little horses" as the Simpsons said).
posted by kersplunk at 3:19 AM on February 20, 2015 [1 favorite]

Actually, at a low level, gambling has some advantages over investing depending on your tax bracket.

For instance, if I had $5000 to use I might go to a casino where they play single deck blackjack and bet 5k one time. If I win I double up, and that is not a large enough amount that I would have to pay taxes. Now, the house has a slight edge, for simplicity sake we can call it 52-48 edge. So, I am a bit worse off than a coin flip. (Disregard card counting, that would actually improve and complicate my case)

If I invest in anything and double up in less than a year and cash out I pay short term cap gains on the gains of approximately 35% leaving me with $8750 after taxes. If I wanted to actually have 10k net after a year I would need to make more like 135%! So certain investing scenarios could actually favor gambling. To be specific:

I have a relatively small amount of money that I want to double in a year. Especially, but not exclusively, if I am in a higher tax bracket.

Where investing really pays off vs gambling is in the long haul, where historically investors enjoy a handsome house edge. This is because historically the market trends up, you benefit from tax deferred compounding, and long term capital gains rates are favorable.

There is more to it all than just this, but it is fun to think about.
posted by jcworth at 6:20 AM on February 20, 2015 [1 favorite]

That's not paying off, that's tax evasion. Just because its under the 10k reporting threshold doesn't mean it isn't taxable
posted by JPD at 6:38 AM on February 20, 2015 [4 favorites]

The chances of a stock investment doubling in less than a year have got to be extremely low.
posted by Steely-eyed Missile Man at 6:40 AM on February 20, 2015

They aren't as low as you think. Of course the odds of stock halving are also a lot higher than you think.
posted by JPD at 6:47 AM on February 20, 2015

but that brings up an interesting point about the role path dependency plays. If you own a broad stock market index, you get the index return. If you own a concentrated basket of stocks or a few bets where you have no skill at all in selection and you hit it big your first few times out, and you follow a few basic rules of thumb about bankroll allocation you'll almost certainly end up better off then just buying a stock market index. But if those first few bests/shares don't work, you'll basically never recover enough off your initial bankroll to generate the index return.

The amusing thing about this, is that "skill" is something like 60/40 rather than 50/50 - so the odds are pretty high that a skilled player craps out and leaves the game while some 50/50 player becomes a "Sharp"
posted by JPD at 6:52 AM on February 20, 2015 [2 favorites]

Here are the basic problems.

First, setting aside transaction costs and imperfections in information, financial markets tend to move up in real terms because they embody the wealth that humans create, and as population and productivity both grow, that wealth organically increases -- while gambling is inherently zero sum.

Second, information is imperfect, but it's far less perfect in most forms of gambling. When you sit down at poker table, you never know how good your opponents are, and you often don't know how good YOU are. At the sports book, all kinds of people with all kinds of inside information are betting against you, and their action is either legal or (if illegal) so infrequently prosecuted as to make it close to risk free. Pure games of chance played perfectly are the only gambling market where a player has better information than an investor.

Third, transaction costs are not zero, and as MrGrimm notes, they are FAR higher in gambling than they are in investing. The vig is multiples higher (eroding the advantage that you might have in a pure game of chance played perfectly). Long-term capital gains are taxed at a lower rate -- in some places they're not taxed at all.
posted by MattD at 10:16 AM on February 20, 2015

to be fair ed thorp was playing blackjack - where information on the odds is perfect.
posted by JPD at 10:52 AM on February 20, 2015

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