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

After discussing why we can understand investment as part of the gambling world, it’s now time to understand why we should erase the gambling/investing distinction.

One reason would be intellectual honesty.  In so many cases, people try to draw lines between gambling and investing because they don’t want to be associated with what is often considered a negative social force.  They do intellectual cartwheels to distinguish their profit-pursuing techniques from those of the folks at the blackjack table more as a matter of status than as a matter of reality.  If you want to relieve a little cognitive dissonance, it makes sense to stop delineating between gambling and investing, recognizing that neither is wise or evil by their nature.

The more important reason, at least for our purposes, to get rid of the line separating the two practices is purely pragmatic.  We’ve already determined that investment is a superior form of gambling.  Wouldn’t it follow that we should take advantage of whatever knowledge we can in order to improve our investment performance?  Recognizing the way investment links to the larger gambling umbrella provides us with perspective and information that can guide smart investing.

Take, for example, this post from a Motley Fool discussion board.  The author is an experienced poker player and has been involved in the markets for over a decade.  His understanding of how gambling and traditional investment interact has led him to some conclusions that could help virtually any investor.  One example:

3. Recognition of high probability situations. Dhandho, in other words. Figure out how to get your money into play with a 60-40 advantage over and over and riches will follow. In investing there are choices every day to hold, buy or sell. Most of the time this will be to hold, but when the high probability situations roll by, grab on and get a piece.
4. The corollary to #3. Don’t bet unless you have lopsided odds. Taking those 51-49 bets, though positive, leads to very high variance. Leave that to the institutional investor who has the bankroll to spread those bets around in enough places to get to the long term. Most individual investors will never get there.

Obviously, there’s some potential for application of lessons learned in the gambling world to the sphere of traditional investment.

Another example?  Discussions of the Kelly Criterion.  Most investors probably haven’t even heard of the Kelly Criterion.  Rest assured that most serious blackjack players have.  A Dash of Insight notes that economists, gamblers and theoreticians don’t necessarily agree on all aspects of the criterion, but it’s certainly a concept with potential applicability to traditional investment.

You can see that in Ray Dillinger’s “Analysis of Multiple Simultaneous Non-Independent Investment Opportunities with Multiple Possible Outcomes”.  It’s a lengthy effort at applying the Kelly Criterion to investment options.  Agree or disagree with all of its presuppositions and conclusions, it’s serious food for thought for any investor.

I chose these two examples to explain why what’s usually termed “gambling” knowledge can be valuable for “regular” investors.  I also chose them because they provide a glimpse at the serious side of gambling, an endeavor often considered juvenile and unguided by those with little direct experience.

Do you need to know when to double down on a soft 14 in order to make smart investment decisions?  Of course not.  It wouldn’t hurt, however, to understand gambling theory and its potential application to stock choices, though.  It might even help.

While researching these posts, I found a few other resources you might want to read.  They’re interesting and add real value to the discussion.

Simple Stock Investing’s “A Walk Through Gambling, Insurance, Investments and Probabilities, or Why Investing Isn’t Gambling, Although It Can Be”.  Although I do argue that investing is gambling, this is a great series of posts explaining the relationship between the two practices and how they interact.  Truth be told, my position and that of the author don’t vary that much.

Dow Investment Group’s “Investing vs. Gambling”.  The summary explains the contents nicely:  ”Some people regard investing as gambling; others, who think they are investing, are, in fact, gambling. The purpose of this paper is to try to help the reader figure out to what extent he may be doing or contemplating either and, thereby, enable him better to allocate his financial assets in accordance with his true needs, objectives, and aspirations.”