{"id":220,"date":"2014-05-09T17:36:07","date_gmt":"2014-05-09T17:36:07","guid":{"rendered":"http:\/\/blogs.stthom.edu\/cameron\/?p=220"},"modified":"2017-04-13T20:54:50","modified_gmt":"2017-04-13T20:54:50","slug":"is-the-stock-market-a-casino","status":"publish","type":"post","link":"https:\/\/blogs.stthom.edu\/cameron\/is-the-stock-market-a-casino\/","title":{"rendered":"Is the Stock Market a Casino?"},"content":{"rendered":"

Detractors of the stock market often liken it to a casino.\u00a0 There are certainly some similarities.\u00a0 Many stock traders, not unlike gamblers, develop addictive personalities, are filled with greed for easy and quick riches, and often overestimate their chances of success.\u00a0 In addition, just like casinos, most stock markets seem to be skewed in favor of the professionals and the smart money.\u00a0\u00a0 Under these conditions, trying to make a living by playing either the stock market or the slot machines is nothing more than a fool\u2019s errand.\u00a0 They both often end in tears.<\/p>\n

There is, however, an important sense in which the stock market is not like a casino.\u00a0 In casinos, the odds of winning, while quite small, are clearly defined.\u00a0 If one plays at the American roulette table, for example, one knows that there is a likelihood of 1\/38 that one can beat the spinning wheel.\u00a0 \u00a0Or in the game of poker, one can calculate quite accurately the probability of being given any particular winning hand.\u00a0 In this sense, therefore, casinos are no different from such similar games as lotteries.\u00a0 In all these situations, to borrow a phrase from the former defense secretary, Donald Rumsfeld, the players are facing the so-called \u201cknown unknowns.\u201d\u00a0 \u00a0Put differently, in casinos, gamblers are facing Risk, where the odds are given, as opposed to Uncertainty, where they are not.\u00a0 In addition, while gamblers collectively lose, their total loss is normally not massive, as evidenced by the limited profits of casinos or revenues of states.\u00a0 In short, while there may be occasional consternations on the Las Vegas Strip, the place hardly experiences widespread panic.<\/p>\n

On Wall Street, however, the situation is quite different.\u00a0 The odds of beating the market are rarely clearly defined.\u00a0 As a result, many investors are facing Uncertainty as opposed to Risk.\u00a0 That is to say, the investors are faced with the \u201cunknown unknowns.\u201d \u00a0This is simply because Wall Street rarely tells us what the future has in store for us.\u00a0 For example, the stock market may be reaching new highs, while at the same time the economy is tanking.\u00a0 Under these conditions, it is quite difficult to decide on the right time to quit the market, notwithstanding the advice given by the experts and their statistical models.\u00a0 The recent financial crisis provides another example of this general state of financial ignorance about the future.\u00a0 During the early part of the crisis, when financial trust was completely lost and there was a widespread credit freeze, many investors dropped all pretensions to their forecasting abilities and simply abandoned ship.\u00a0 As a result, and given that the losers far outnumbered the winners, investors managed to collectively lose a significant portion of their wealth.\u00a0 In fact, most \u201cinvestment banking casinos\u201d ended up bankrupts themselves.\u00a0 Thus, when things go wrong on Wall Street, there is more than consternation, there is panic.<\/p>\n

The fact that the stock market is not a casino, however, is rarely acknowledged by the academia.\u00a0 They continue to build sophisticated probabilistic models to predict the future returns of asset prices.\u00a0 In addition, all of these models are based on the questionable assumption that these returns follow normal (bell-shaped) curves.\u00a0 As it is well known, normal curves tend to underestimate the frequency of rare events by wide margins.\u00a0 For example, according to these curves, the daily changes of 7 percent in the stock market should happen once every three hundred thousand years.\u00a0 In reality, they happen on average once every two years.\u00a0 \u00a0Thus, normal curves can offer a false sense of security to investors.<\/p>\n

In summary, the stock market is not a casino.\u00a0 It is a far more dangerous place, at least in the short run.<\/p>\n

Hassan Shirvani, Ph.D.<\/a>
\nProfessor Cullen Foundation Chair in Economics<\/p>\n

See more posts by this author<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Detractors of the stock market often liken it to a casino.\u00a0 There are certainly some similarities.\u00a0 Many stock traders, not unlike gamblers, develop addictive personalities, are filled with greed for easy and quick riches, and often overestimate their chances of success.\u00a0 In addition, just like casinos, most stock markets seem to be skewed in favor…<\/p>\n","protected":false},"author":5,"featured_media":223,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[33,37,6],"tags":[18,22,96],"class_list":["post-220","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commentary","category-csb-faculty","category-economics-economics","tag-economics-2","tag-hassan-shirvani","tag-stock-market"],"yoast_head":"\nIs the Stock Market a Casino? 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