What's the Difference Between the Stockmarket and the Racetrack?

Authors

  • D J Johnstone School of Business University of Sydney

DOI:

https://doi.org/10.5750/jgbe.v1i2.513

Abstract

There are many anecdotes likening the stockmarket to betting, often voiced from the perspective of an inexperienced investor or gambler to whom the risks seem the same in either marketplace. A fundamental aspect of the stockmarket that separates it from all forms of gambling is that a naive investor who carries a well diversified portfolio, and holds it long enough, is bound to win (based on historical evidence at least). In gambling markets, an unsophisticated player is bound to lose, the more so the longer he plays. For well informed or otherwise sophisticated traders, the racetrack and stockmarket are effectively analogous, in that both present opportunities to take money off less well informed players, albeit not so much that they lose interest. The stockmarket does not offer the recreational attractions of the racetrack, and must therefore return profits to most or all investors, at least in the long run, if they are to stay in the game.

References

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Levitt, S.D. (2004) Why are Betting Markets Organized So Differently From Financial Markets? The Economic Journal 114: 223-246.

Published

2013-01-02

Issue

Section

Articles