38

Investors seeking a higher return on their investments may invest in things that they know have a higher risks associated with them. Greek bonds have higher interest rates, and banks charge more interest for credit card users with lower credit scores.

Lottery tickets have an extremely-high likelihood of paying nothing, but in the cases where they do pay out, the returns are also extremely-high. How does this differ from actual investing? What rules can we use to draw the same distinction for other high risk activities that are also not investments?

NL - Apologize to Monica
  • 32,709
  • 19
  • 85
  • 144
ACV
  • 513
  • 1
  • 4
  • 8
  • 5
    There's an exhaustive analysis of the odds and return rates of various US lotteries here. Compare that with the "risk vs return" charts usually associated with investments and I reckon buying a lottery really doesn't qualify... though gambling on roulette comes closer. :-) – Peter K. May 10 '16 at 12:26
  • 9
    Duplicate of http://money.stackexchange.com/questions/57931/are-lottery-tickets-ever-a-wise-investment-provided-the-jackpot-is-large-enough/57964#57964 – Eric Lippert May 10 '16 at 17:57
  • @PeterK. While that's true in the general case, when major lotteries end up with very large jackpots, the odds can shift in the player's favor. Take the most recent record-setting PowerBall jackpot. At $1.586 billion, and a $2 ticket offering 1 in 292 million odds, the player had a huge mathematical edge, even before accounting for the possibility of winning prizes other than the jackpot. In the past, investment groups have taken advantage of this as well.. – HopelessN00b May 10 '16 at 19:42
  • 1
    @HopelessN00b: Very, very wrong. See the linked dupe especially: even though the jackpot itself can theoretically grow without bound, there is a point at which the consequent ticket-buying grows to such a fever pitch that the expected value of the jackpot actually starts going down again. – Peter K. May 10 '16 at 19:48
  • @PeterK. Which fails to consider the non-jackpot prizes, which account for a significant portion of the value in cases where all possible lotto numbers are purchased. For that matter, the dupe you linked at me contains an answer which provides three examples of lottos which were exploited for a mathematical advantage and a positive EV. – HopelessN00b May 10 '16 at 20:10
  • @HopelessN00b : Right, for which the loopholes have been closed. I agree that new lottery systems can be exploited, it's just a losing proposition on established ones. – Peter K. May 10 '16 at 20:15
  • 1
    See also: How does modern Wall St. work in NYS gambling laws? – WBT May 10 '16 at 20:46
  • @HopelessN00b, the exception is not the rule. Those were fundamentally flawed lotteries. – quid May 10 '16 at 20:46
  • 2
    An interesting twist is the concept of "No Lose Lotteries" which are much closer to investments than the regular lottery http://freakonomics.com/podcast/freakonomics-radio-who-could-say-no-to-a-no-lose-lottery/ – JohnFx May 10 '16 at 20:47
  • 1
    I'm voting to close this question as off-topic because it is about gambling and not personal finance and investing. – Victor May 10 '16 at 21:37
  • @quid No, the Virginia one cited was a standard lotto, where the jackpot greatly exceeded the cost of buying a ticket for every possible numerical combination. – HopelessN00b May 11 '16 at 02:21
  • @HopelessN00b, "the jackpot greatly exceeded the cost of buying a ticket" is a fundamental flaw. – quid May 11 '16 at 02:33
  • 2
    @quid No, it's not. It's a standard way of running a lotto with a rolling jackpot. In fact, it's kind of the whole point of rolling jackpot lottos like the PowerBall. The bigger the jackpot gets, the more tickets are sold, generating more profit, because they take 50% of the ticket sales as profit, with the other half going into the prize pool. The more tickets they sell, the more profit they make, period. You can't say it's a flaw just because you don't like that it destroys your argument. – HopelessN00b May 11 '16 at 02:41
  • 1
    One point of view might be that an investment is something you buy based on quantification of EV. Of course a sane person buys only those with positive future value (in the world of negative interest rates it can be something preserving value better than holding currency :)). Standard lotteries are highly EV- games, therefor they don't qualify as investments. – user965748 May 13 '16 at 03:13
  • 2
    I'm voting to close this question as off-topic because questions on wagering and gambling are specifically off topic, see http://money.stackexchange.com/help/on-topic – JTP - Apologise to Monica May 13 '16 at 23:50
  • @BenMiller , are you suggesting we remove the “no gambling questions” from FAQ or that this question doesn’t fall under that? – JTP - Apologise to Monica Mar 14 '19 at 01:56
  • @JoeTaxpayer In my mind, the spirit of the "no gambling" rule is that we don't want to cover questions on the details of playing blackjack, poker, etc, which might arguably be "money" or "personal finance" questions if we didn't have this stipulation. This question is specifically how gambling relates to investing, and investing is on-topic. (Note: because you didn't ping me with an @, I didn't see your comment until now.) – Ben Miller Apr 08 '19 at 13:54

9 Answers9

62

There is a clear difference between investing and gambling.

When you invest, you are purchasing an asset that has value. It is purchased in the hopes that the asset will either increase in value or generate income. This definition holds true whether you are investing in shares of stock, in real estate, or in a comic book collection. You can also purchase debt: if you loan money, you own debt that will (hopefully) be repaid and generate income.

Gambling is playing a game for chance. When you gamble, you have not purchased an asset; you have only paid to participate in a game. Some games have a degree of skill (blackjack, poker), others are pure chance (slot machine). In most gambling games, the odds are against the player and in favor of the one running the game.

Lottery tickets, without a doubt, are gambling.

There is a good article on Investopedia that discusses the difference between investing and gambling in more detail.

One thing that this article discusses is the house edge, or the advantage that the people running a gambling game have over the players. With most casino games, the house has an advantage of between 1 and 15% over the players. With a typical lottery, the house edge is 50%.

To address some of the points made by the OP's recent edit and in the comments:

I do not think the definitions of investment and gambling need to be dependent on expected value. There can be bad investments, where the odds of a good result are low. Similarly, there could be gambling games where the odds are in the player's favor, either due to the skill of the player or through some quirk of the game; it's still gambling.

Investing is purchasing an asset; gambling is a game of chance.

I do not consider a lottery ticket an asset. When you buy a lottery ticket, you are just paying a fee to participate in a game. It is the same as putting a coin in a slot machine. The fact that you are given a piece of paper and made to wait a few days for the result do not change this.

Assets have inherent value. They might be valuable because of their ability to generate income (stocks, bonds, debt), their utility (precious metals, commodities, real estate), or their desirability as a thing of beauty (collectibles), for example. A lottery ticket, however, is only an element of a game. It has no value other than in the game.

Ben Miller
  • 115,533
  • 30
  • 329
  • 423
  • 17
    Note too that gambling and investment are taxed quite differently. – keshlam May 10 '16 at 12:49
  • 60
    I don't really follow your logic. A lottery ticket for a drawing in the future is an asset that has an expected value. The expected payoff is usually lower than the price I paid for it, sure. However, it has a positive chance of generating a payoff. In this, it's not too different from a standard option, which is also priced and traded. I think your distinction does not capture the difference too well. – Stephan Kolassa May 10 '16 at 15:22
  • 10
    It seems to me like a better distinction would be that an investment has a positive expected value, whereas a lottery ticket and any gamble usually has a negative one, or potentially a zero expected value in the case of a zero-sum game. Then a heavily discounted lottery ticket would indeed qualify as an investment. However, this is a "definition" of investment vs. gambling that I just pulled out of my whatever. – Stephan Kolassa May 10 '16 at 15:25
  • 4
    @StephanKolassa You could stretch the definition of an asset to let a lottery ticket qualify, I suppose. However, a lottery ticket only has value as an element to a game. It has no inherent value outside of that game; there is nothing backing it but the game itself. – Ben Miller May 10 '16 at 15:30
  • 14
    @Stephan: someone trying to mess up your definitions could perhaps argue that certain derivatives (such as a CFD) only have value "in the game", i.e. they only have value because they represent a promise to pay out according to a certain event. It's not much difference from sports betting, you're just betting on share prices instead of sports. Far be it from me to say that some things classified as investment could to be called gambling, or vice-versa, but to some extent this is a "know it when you see it" distinction. – Steve Jessop May 10 '16 at 15:53
  • 1
    @SteveJessop: I was about to mention options... or insurance contracts. – Stephan Kolassa May 10 '16 at 15:57
  • 6
    @Stephan: right, insurance has a negative expected profit. But at least you can tell it's not a game in that it's way too boring. – Steve Jessop May 10 '16 at 15:59
  • Just to note, the house edge in the lottery is actually very close to the house edge in a casino for a similar proposition, namely, turning (e.g.) $1 into $1 million, at a high-limit table game where you can't win in one shot. The math works out this way because to win in this way in a casino you basically need to win an unbroken series of bets where you double your money each time, and the house advantage on parlayed money increases with each press. Slots and such games where you can win it in one shot are a bit different, assuming you never recycling your winnings back through the machine. –  May 10 '16 at 18:10
  • 1
    @StephanKolassa the mathematical distinction is arbitrary. There are many extra-mathematical (psychological, semiotic, cultural, legal) reasons that are very important. – djechlin May 10 '16 at 18:24
  • 1
    @StephanKolassa — With the assumption that any item has monetary worth only equal to what a person is willing to pay — how much can you re-sell a lottery ticket for? – Scott Simpson May 10 '16 at 18:46
  • 3
    @ScottSimpson: suppose I offer you a bundle of 1,000 lottery tickets, all with different numbers, for next Saturday's drawing. Each one has an independent 1 in 1000 chance of paying you 100$. Would you be willing to pay for that bundle, and if so, how much? (Let's not go into the legality of re-selling tickets.) – Stephan Kolassa May 10 '16 at 19:21
  • 1
    For me personally — very little — I would be concerned it was some sort of scam and would prefer to buy tickets from an authorized dealer. Others may be more tempted. – Scott Simpson May 10 '16 at 19:25
  • 2
    What if you buy government bonds that have a negative interest rate? Is that an investment? The fact that the lottery may be a bad investment doesn't mean it can't be an investment. – Zach Lipton May 10 '16 at 21:11
  • What if you buy all possible lottery tickets? – R.. GitHub STOP HELPING ICE May 11 '16 at 00:21
  • 1
    "In any gambling game, the odds are against the player and in favor of the one running the game." - This is not the whole story. If there are multiple players competing against one another (instead of against the house), it is entirely possible that there is no edge, as in poker. True, the house does still get its pound of flesh (by taking a cut of the pot), but odds have nothing to do with this. – Kevin May 11 '16 at 04:42
  • I've added a section to my answer to address some of the points in the comments. – Ben Miller May 11 '16 at 05:08
  • There is also famous a paradox https://www.wikiwand.com/en/St._Petersburg_paradox where the expected value is infinity, and yet I would bet that most people wouldn't pay for that lottery very much. So making a distinction between lottery and investment based purely on expected value is faulty. – Honza Brabec May 11 '16 at 07:13
  • 10
    I don't see anything in this answer nor the quoted article that seem substantive or compelling. Derivatives sink the "investment is purchasing an asset" claim. Odds are subjective: a significant number of people who buy lottery tickets judge the odds to be in their favor in whatever sense is meaningful to them, so to them it's an investment if investment means having positive expected return. From what I can make out, "gambling" and "investments" have value in the same way, and rely on chance in the same way. I can't make out any difference between the two other than use of loaded terms. – Don Hatch May 11 '16 at 09:48
  • 5
    Why must the terms "gambling" and "investing" be mutually exclusive? There is plenty of overlap between them depending on the context. – jkuz May 11 '16 at 18:15
  • 1
    @DonHatch You beat me to my point. I was going to bring up ETFs, whish are investments where you definitely don't own an asset. Both sides of this argument are flawed and arbitrary. For many people stocks are just elements in the game of "stock trading". – Myles May 11 '16 at 22:01
  • Derivatives, ETFs, Mutual Funds: Even if you don't technically own the underlying asset, the value of these things are backed by assets. – Ben Miller May 11 '16 at 22:32
  • It seems to me that there is little difference between a lottery ticket and many "investments" whose return is typically defined using random variables. Also, I hear the phrase "that investment is a gamble," suggesting the line is different. – Cort Ammon May 11 '16 at 22:36
  • 2
    @BenMiller Similarly, the value of a lottery ticket is indirectly backed by cash held by the lottery agency. – Aaron Dufour May 12 '16 at 03:15
  • 1
    You say "the definitions [don't] need to be dependent on expected value" but that seems to be the main thrust of the article you link to, eg "investments in stocks, bonds and real estate, if held long term, usually pay off." vs "gambling is a no-win venture, and not at all comparable to investing" – stewbasic May 12 '16 at 06:05
  • Companies on the stock market's 'value' is only a virtual concept based on the popularity of the share rather than the true worth or lack of worth in a company. Essentially people are gambling on what the market will do in the furture, not in what the company is actually worth. So I'm not sure that your distinction between gambling and investing is quite as clear as you seem to think. I think the danger is that people view 'investing' as safe and 'gambling' as risky when as you show the odds/return don't always sit that way mathematically. – JamesRyan May 12 '16 at 11:38
  • @R.: if you buy all possible tickets then (depending on the rules of the lottery) you're probably "gambling" on how many other people buy a winning ticket, since you're going to split the jackpot with them. The return from prizes not drawn from the jackpot pool might be fixed, but nevertheless presumably is still taxed/regulated as gambling because the law doesn't take account of the fact you've turned each individual gamble/ticket into a total safe return (albeit the safe part is a net loss). Same if you cover the board in roulette except the lottery has no 0. – Steve Jessop May 12 '16 at 13:04
  • ... or on a horse race, you could make a bet of a different amount on every horse so that your return is the same regardless of what horse wins. Unless the bookie has lost his calculator your profit will be negative, but good luck going to the tax man to write it off as an investment loss, or that it doesn't matter that you're under the legal age to gamble, or whatever ;-) – Steve Jessop May 12 '16 at 13:08
  • @SteveJessop: While logistically it's not practical, buying all possible lottery tickets when the jackpot has gotten very large has expected returns much higher, and risk much lower (assuming proper execution, i.e. only risk is that the number of winners exceeds tax_adjusted_jackpot/cost_of_all_tickets), than many investments. It's very different from betting on all horses where the expected return is still a loss. – R.. GitHub STOP HELPING ICE May 12 '16 at 20:32
  • @R.. See Are lottery tickets ever a wise investment provided the jackpot is large enough? for more thoughts on that point. – Ben Miller May 12 '16 at 20:36
  • @BenMiller: Empirically, has there ever been a case when a giant jackpot was split so many ways that buying all possible tickets to win would have been a loss? I don't recall seeing splits worse than 5-way or so. – R.. GitHub STOP HELPING ICE May 12 '16 at 20:41
  • @R. All of them. Even the recent record Powerball jackpot: If you had bought all tickets at $350M, then split the cash value jackpot ($984M) four ways with the three that actually did win, you would lose. Even before you pay your taxes. – Ben Miller May 12 '16 at 20:54
28

From a mathematical expected-value standpoint, there is no difference between gambling (e.g. buying a lottery ticket) and investing (e.g. buying a share of stock). The former probably has negative expected value while the latter probably has positive expected value, but that is not a distinction to include in a definition (else every company that gives a bad quarterly earnings report suddenly changes categories).

However, investment professionals have a vested interest in claiming there is a difference; that justifies them charging fees to steer you into the right investment. Consequently, hair-splitting ideas like the motive behind a purchase are introduced. The classification of an item to be purchased should not depend on the mental state of its purchaser.

Depending on the situation, it may be right to engage in negative EV behavior. For example, if you have $1000 and need $2000 by next week or else you can't have an operation and you will die (and you can't find anyone to give you a loan). Your optimal strategy is to gamble your $1000, at the best odds you can get, with a possible outcome of $2000. So even if you only have a 1/3 chance of winning and getting that operation, it's still the right bet if you can't find a better one.

Vadim Ponomarenko
  • 601
  • 4
  • 4
  • In your example the optimal strategy is to seek financing. – quid May 10 '16 at 17:41
  • @quid Financing often takes more than a week to acquire, and even so it, like the gamble, has some EV of success. With only a week to live gambling might indeed have better odds. – par May 10 '16 at 18:03
  • 11
    @VadimPonomarenko You could improve your answer by removing the second paragraph. It's your commentary (bias) against investment professionals that makes your answer appear to be a rant. Without that paragraph your answer holds up reasonably well. – par May 10 '16 at 18:05
  • 1
    @par, I disagree. My second paragraph is important, as it explains why evidence can easily be found suggesting a difference. However I did modify my paragraph slightly to address your suggestion. – Vadim Ponomarenko May 10 '16 at 18:36
  • The optimal strategy is never spend all of your money on lottery tickets. You are far more likely to have $0 in a week than 2x your initial sum. Your second paragraph does not provide evidence it provides totally unproven speculation that gambling is a good source of financing. – quid May 10 '16 at 18:57
  • 3
    In point of fact, there have been (and AFAIK, still are) investment groups that will purchase every possible ticket in major lottos when the math works in their favor, for lotteries that haven't banned bulk purchases. An Australian group famously did this for a Virginia lotto - spent 5 million in tickets and got a 27 million dollar payout. The last time the PowerBall had a record pot, a $2 ticket gave 1 in 300 million odds at a $1.2 billion prize. Favorable odds to play. – HopelessN00b May 10 '16 at 19:21
  • 2
    -1. Totally disagree. gambling is not equal to stock market investing. Gambling is about odds, Stock market is about fundamental analysis and technical analysis will always beat gambling. There are ppl that gamble agaisnt other people and some make some money, but stock market is a much better "bet" – Marcus D May 10 '16 at 19:50
  • 3
    I downvoted this, it's 3 paragraphs devoted to counterfactual arguments that lottery tickets might be OK in hypothetical corner cases. While mathematically correct, that doesn't make for a good answer. I don't upvote answers just because they contain math that is correct. – djechlin May 10 '16 at 19:51
  • 13
    @djechlin What sort of answers do you upvote? Only those that make you feel good? If you make only those sorts of investments you're likely to go broke. Like it or not, relying on sound mathematical analysis is the smart play. – par May 10 '16 at 20:26
  • 1
    @par the mathematical analysis in this answer is valid, not sound. I upvoted the accepted answer if you are curious. – djechlin May 10 '16 at 20:33
  • 4
    I downvoted this. The first sentence is incorrect. By the way, a stock that has recently lost value has NOT necessarily also lost expected future value. – Ryan May 10 '16 at 21:34
  • 1
    -1. The first paragraph is correct in that buying a lottery ticket and buying shares of a stock can be analyzed using the same mathematical techniques, but the other two paragraphs are an irrelevant rant. – Mark May 10 '16 at 22:25
  • 11
    Great answer. Interesting that it seems to be angering people, since to me, the answers that ridicule gambling and claim there's a clear difference, without giving any evidence at all, are the ones that seem biased and bother me, whereas yours and @james-turner 's are a refreshing breath of sanity. Regarding your discussion of "negative EV behavior" possibly being rational, I believe you're talking about utility function (see wikipedia). I think once one "gets it" that EV of $$ isn't the only possible choice, one's condescending attitude tends to diminish. – Don Hatch May 11 '16 at 10:17
  • 1
    A very good answer, and in my opinion the only valid one: for a rational investor, only expected value matters; so the difference between investing and gambling is simply that gambling necessarily has negative E.V while investing implies trying to maximize E.V. (that is, maximizing potential profit while minimizing risk). A great story: "The math whizzes quickly discovered [..] Buying $600,000 worth of tickets would bring a 15%–20% return on investment" http://newsfeed.time.com/2012/08/07/how-mit-students-scammed-the-massachusetts-lottery-for-8-million/. This is investing, not gambling. – Symeof May 13 '16 at 14:09
26

This question feels like an EL&U question to me, and so I will treat it as one.

Investment, noun form of to invest, originally from the Latin investire, meaning to clothe, means:

[T]o commit (money) in order to earn a financial return

Merriam-Webster Online Dictionary, Invest, vb. tr., definition 1

As such, when a person commits money with the purpose of earning a financial return, they are investing. Playing the lottery, when done so for the purpose of financial return, would fall under this definition - even if it's a poor choice.

Gambling, verb tense of to gamble, likely originally from the word gamen, meaning to play, means:

a : to play a game for money or property

b : to bet on an uncertain outcome

Merriam-Webster Online Dictionary, Gamble, vb. itr., definition 1

Playing the lottery is clearly gambling (as a lottery is a game, by definition).
The second definition could well include investing in the stock market, particularly certain kinds of investments (derivatives, currency speculation, for example).

Aside from the definitions, however, normal usage clearly favors investment to be something with an expectation of positive return, while gambling is taking a risk without that expectation (rather with the hope of positive return). Legally, as well, playing the lottery is not something that is considered investment (so it is taxed differently). However, the question was "Can", and by definition, clearly it can be (assuming you are not asking legally).

Community
  • 1
Joe
  • 35,786
  • 6
  • 90
  • 128
  • 1
    Nice analysis. However, here the economic meaning of investment would be more appropriate. "In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price." – ACV May 10 '16 at 19:50
  • 3
    @ACV I considered a more narrow definition as you list, but even then the appropriate definition (the finance definition) includes lottery tickets purchased with the idea that they will provide income in the future - simpler to stick with the basic English definition, I think. – Joe May 10 '16 at 19:52
  • 2
    I like this answer the best, because it illustrates something that people don't want to admit due to negative connotations. But all "investing" is simply a subset of gambling. You cannot make an investment without taking a gamble; because you cannot commit money without the risk of losing it. – 8bitwide May 13 '16 at 01:58
16

Why must terms must be mutually exclusive?

This (false) dichotomy is what seems to cause the most debate.

It is the SINGLE EVENT OUTCOME that defines gambling.

Gambling will involve an aleatory contract. That is, the outcome is specifically tied to a single event that determines profit/loss. This could be the outcome of a race or the roll of a dice, but should involve chance.

This is why gambling is often in the context of a game, but I would make the argument that some investment tools fall into this category - The price of a stock at a certain date, for example. This may also be called "betting", which opens up a whole other discussion.

Investing has no such implication, and as such it is the broader term.

Investing is to put something (money) to work to return a profit. Some forms of gambling could fall under this umbrella. Some would say that is a "bad investment" and even if they are right, it may still be the desire and intent of the investor to make a profit.

Not all gambling falls under investing. You can gamble for pleasure.

The profit/loss of most investments are not contractually tied to a specific event or outcome (e.g. the price of a stock over 10 years is the result of many events affecting its market value). Such an investment would not be considered gambling.

jkuz
  • 3,970
  • 1
  • 12
  • 22
  • 1
    +1 for false dichotomy. Note also that many people invest in the stock market for fun, buying and selling stocks themselves in a situation where they would be financially better off paying someone else to handle their investments. – Era May 11 '16 at 18:50
  • @BenMiller Yes, I think this is what you were saying too in your answer, and exactly why investors should not rely on such contracts for returns! The risk of loss is often stupidly high, to the point of being non-defensible. If a licensed professional put someone in such an 'investment' product, they would be sued. From the discussion here, it also seems that some people consider any exchange involving uncertainty as a form of gambling, but that is a shallow perspective. I think 'investing' is such a broadly applied term by different people that the question is almost unanswerable. – jkuz May 12 '16 at 14:55
  • 1
    Binary options and Credit Default Swaps are examples of financial instruments based on a single event. – Dev May 12 '16 at 15:25
  • @Dev Indeed! Any form of insurance, too, may be considered a gamble. With insurance, it is generally considered a balance between the capital loss and the risk loss from (say) death. It is a measured and appropriate bet for many people. Interestingly enough, I don't know anyone who would consider term insurance an investment tool. – jkuz May 12 '16 at 17:07
8

Although this has been touched upon in comments, I think the following line from the currently accepted answer shows the biggest issue:

There is a clear difference between investing and gambling.

The reality is that the difference isn't that clear at all. Tens of comments have been written arguing in both directions and looking around the internet entire essays have been written arguing both positions. The underlying emotion that seems to shape this discussion primarily is whether investing (especially in the stock market) is a form of gambling. People who do invest in this way tend to get relatively emotional whenever someone argues that this is a form of gambling, as gambling is considered a negative thing.

Ambiguity in language

The simple reality of human communication is that words can be ambiguous, and the way investors will use the words 'investments' and 'gambles' will differ from the way it is used by gamblers, and once again different from the way it's commonly used. What I definitely think is made clear by all the different discussions however is that there is no single distinctive trait that allows us to differentiate investing and gambling. The result of this is that when you take dictionary definitions for both terms you will likely end up including lottery tickets as a valid form of investment.

That still however leaves us with a situation where we have two terms - with a strong overlap - which have a distinctive meaning in communication and the original question whether buying lottery tickets is an investment. Over on investorguide.com there is an absolutely amazing strongly recommended essay which explores countless of different traits in search of a difference between investing and gambling, and they came up with the following two definitions:

Investing:

"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): sufficient research has been conducted; the odds are favorable; the behavior is risk-averse; a systematic approach is being taken; emotions such as greed and fear play no role; the activity is ongoing and done as part of a long-term plan; the activity is not motivated solely by entertainment or compulsion; ownership of something tangible is involved; a net positive economic effect results."

Gambling:

"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds are unfavorable; the behavior is risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results."

The very interesting thing about those definitions is that they capture very well the way those terms are used by most people, and they even acknowledge that a lot of 'investors' are gambling, and that a few gamblers are 'investing' (read the essay for more on that). And this fits well with the way those two concepts are understood by the public. So in those definitions normally buying a lottery ticket would indeed not be an investment, but if we take for example Vadim's operation example

If you have $1000 and need $2000 by next week or else you can't have an operation and you will die (and you can't find anyone to give you a loan). Your optimal strategy is to gamble your $1000, at the best odds you can get, with a possible outcome of $2000. So even if you only have a 1/3 chance of winning and getting that operation, it's still the right bet if you can't find a better one.

this can suddenly change the perception and turn 'gambling' into 'high-risk investing'.

Community
  • 1
David Mulder
  • 226
  • 2
  • 8
7

I am reminded of a dozen year old dialog. I asked my 6 year old, "If we call a tail a leg, how many legs does a dog have?" She replied, "Four, you can call it anything you want, but the dog still has four legs."

Early on in my marriage, my wife was heading out to the mall, and remarked that she was "going to invest in a new pair of shoes." I explained to her that while I was happy she would have new shoes to wear, words have meaning, and unless she was going to buy the ruby red slippers Dorothy wore in the Wizard of Oz, or Elvis' Blue Suede Shoes, her's were not expected to rise in value and weren't an investment. Some discussion followed, and we agreed even the treadmill, which is now 20 years old, was not an 'investment' despite the fact that it saved us more than its cost in a combined 40 years of gym memberships we did not buy.

In the end, no one who is financially savvy calls a lottery ticket an investment, and few who buy them acknowledge that it's simply throwing money away.

JTP - Apologise to Monica
  • 172,273
  • 34
  • 296
  • 560
  • 2
    Oh, so she was the one who invented that joke about the dog! – Zenadix May 10 '16 at 19:17
  • 3
    Okay, so in your opinion buying a lottery ticket is simply throwing money away. (1) Not everyone has the same utility function as you. I'd venture to say many people have a utility function that makes the purchase of a lottery ticket have expected positive return on utility, making it perfectly good investement for them. (2) Many arguably sane people, probably yourself included, can say the same thing about many "investments": that they are throwing money away. So have you said anything that distinguishes between the two at all? Or is the difference defined simply by the speaker's opinion? – Don Hatch May 11 '16 at 09:59
  • 4
    What I do know is that such questions degrade into an argument of semantics. And these arguments, while interesting, are off the topic of personal finance. Does the OP really wish to include lottery tickets as part of a balanced portfolio, or did he come here for an argument in the true "Monty Python" sense of the word? For what it's worth, Don, I see you have a mix of site memberships here that I find respect-worthy. Please don't judge any members here by these questions when there are thousands that are far more insightful, helpful, etc. Hopefully this one is voted closed soon. – JTP - Apologise to Monica May 11 '16 at 11:33
7

logically, yes. legally, no.

any reasonable definition of an "investment" must include some types of gambling and insurance. lottery tickets specifically are really crappy high risk/high return investment. obviously most people try to avoid investments with a negative average expected future value, but from a purely semantic perspective anything with a potential future value is an investment. conversely, anyone with a gambling problem should not pretend they are not gambling when making focused investments in high volatility stock options.

that said, the irs taxes gains and losses differently depending on whether they are classified as "gambling", or just "crappy investing". so you will not be able to deduct your gambling losses from your earned income (unlike investment losses which can be deducted up to 3k$ per year).

teldon james turner
  • 3,002
  • 12
  • 17
  • 3
    Buying insurance is not an investment under any definition I don't think (unless you're an insurance underwriter); it is something you purchase to reduce your risk, not with the expectation of gaining money from it. – Joe May 10 '16 at 19:53
  • why would you buy insurance if you didn't think there was a possibility that it would pay you in the future? the fact that the payout is likely to coincide with a similar financial loss is immaterial to the classification of the investment itself. in fact, life insurance companies work hard to avoid selling policies to people who do not have an "insurable interest" (and usually fail miserably). – teldon james turner May 10 '16 at 20:23
  • in fact, if i work for a small company and all my coworkers were in the same lottery pool, it would be foolish for me to not join the pool. such a purchase of a stake in a lottery ticket would be insurance by any reasonable definition of the word. – teldon james turner May 10 '16 at 20:25
  • 2
    Insurance is not an investment because it's not purchased with the intent of earning money (see my definition). It's purchased to ameliorate the risk of losing money. I don't buy automobile insurance hoping to get paid by the insurer - I buy it to make sure I don't lose a ton of money in an accident (laws requiring it aside). – Joe May 10 '16 at 20:26
  • 1
    maybe you don't buy car insurance with the intent of earning money, but i do. once i get a good payout for hail damage, i pocket the cash and switch to liability only. classifying an investment by the mindset of the investor seems like a silly thing to do. – teldon james turner May 10 '16 at 20:27
  • 3
    Insurance is about managing risk by turning a potential large expense into a definite small expense. If you're buying insurance for any other reason, you're pushing the edges of insurance fraud. – Mark May 10 '16 at 22:29
  • @Mark like i said. logically, yes, legally, no. – teldon james turner May 11 '16 at 17:57
1

Buying lotteries tickets makes you the fish not the fisher. Just like casinos or drugs. If you like, you can call buying tickets an "investment" or better yet, a donation in the lottery's owner wealth. No real investor is dumb enough to get into a business where 99.9999999% of the "investors" lose EVERYTHING they invested. Besides, a real investments means BIG money. You can call it so if you are ready to sell your house and buy tickets of all those money, but still, the risk is so high that it's not worth it.

iqkrdo
  • 19
  • 2
-2

Something that is missing from the discussion is the actual market for the lottery ticket -- if a market existed for the tickets themselves, that would make this far more obvious, but since there isn't one; buying a single ticket gives different Expected Values, but since the ticket has a defined 'game' instance, a single ticket is a gamble.

Playing the lottery in the long run could be part of a high risk investment portfolio.

[edited for clarity]

sp7
  • 1