[Welcome to the fourth installment of our gambling/investing series. Just in case you missed them, you can still read Part One, Part Two and Part Three.]

We’ve seen the way investing falls into the category of gambling from a definitional point of view. We’ve also noticed that the two practices have some strong similarities.

Many, however, argue that gambling and investing are not related. Let’s look at a handful of their arguments.

Unproductive Risk vs. Productive Risk. Gambling, some argue, represents an unnecessary and unproductive risk. Investment, on the other hand, involves risks necessary for the functioning of the overall economy.

This argument is often presented by those who are trying to find a way to morally justify investment while holding true to the tenets of their faith that cast gambling in a sinful light. Dave Rodeback, for instance, couches the argument in terms of a discussion within the LDS noting, in part:

Gambling is just the opposite. It creates unnecessary risk, either for entertainment, to satisfy an addiction, or because someone wants to get something for (almost) nothing. Overall, it is not a productive risk, except for the casino, government, or church which sponsors it. What is won never exceeds what is lost, and if a sponsoring organization gets some of the money, what the winners win can be far less than what the losers lose. By contrast, investing in business typically creates more wealth.

I actually think this is one of the stronger arguments in favor of a gambling/investing distinction, but it still has some weaknesses.

Initially, it starts with an assumption that capitalistic economic structures are essentially moral in nature. You can make that argument, but there are plenty of people out there who will argue otherwise. Those who advocate a distinction don’t make the argument. They start with it as a presupposition, despite the fact that it’s in contention.

Secondly, it makes unfair or inaccurate assumptions about the motivations behind the activity. Most investors don’t invest for any moral reason. They invest for the same reason others gamble–to profit. The fact that there could be some kind of socially productive element to the investment process is secondary in the decision making process, if present at all. Meanwhile, all of the ugly motives often ascribed to gambling are applicable to the behaviors of many investors.

Third, arguing that the risk is productive with investment because it often produces desirable ends has nothing to do with the process of investing itself. There’s nothing intrinsic in investment that makes it productive. We can easily imagine investment in socially irresponsible, yet profitable, endeavors that would do more harm than good. Wealth generation isn’t a necessarily good thing. It all depends on who’s creating the wealth and what they decide to do with it.

Tangible vs. Intangible. Another reason some claim that gambling is distinct from investing involves what one actually “gets” for his or her money. Finance Mind explains:

When you place a bet on a casino game, you are actually buying a “chance or opportunity”. It is an intangible product.

When you invest in stocks, you are investing in the business. You are investing into a tangible product or business.

That’s true. The question is whether or not it really matters. Personally, I don’t think that it does in terms of differentiating between gambling and investing.

Most investors aren’t really interested in their tangible ownership of a company in which they’re investing. They’re interested in whether or not the value of that interest grows. Why do they have that interest? It’s not because they want to help build the company. It’s because, at some point, they want to sell the stock at a profit (or to borrow against its value).

The element of tangibility is there, but it doesn’t really govern how anyone approaches the market.

Gamblers choose their games and make their plays in hopes of profiting. They aren’t concerned with owning a chunk of the casino or sports book. They’d be out of luck if they were. The underlying thinking of a gambler, however, isn’t dissimilar from that of an investor. They want a return.

We’ll look at more of the arguments favoring a separation of gambling from investing tomorrow…