I'm standing inside the Wynn Casino in Las Vegas last Tuesday, a day on which the stock market declined about 300 points -- roughly three percent. I've been playing blackjack, and losing quickly. I don't bet a lot, generally the cheapest table in the house, and usually once a year for a couple of hours. But here at the Wynn, the minimum is $15 per hand. I've been getting the worst cards anyone at the table has ever seen. My $200 budget is gone in fifteen minutes.
I feel my cell phone vibrate in my pocket. I look at the number, and the area code is the same out-of-town one that a couple of my closest friends have, so I step back from the table and answer the phone.
On the other end is a prospective client for Abacus, my investment management business. In fact, it's the largest prospective client I currently have. I hear a slot machine start going crazy about twenty feet away. I suddenly realize that the gentleman on the other side of the phone might be able to hear the distinctive sounds of a casino in the background; sounds unlike virtually any other place on Earth, with the possible exception of Chuck E. Cheese. I try to muffle the microphone so that he can't hear the background noise as we discuss our upcoming meeting time.
I hang up the phone and think to myself, 'What must this guy think of me? It's a Tuesday at 1pm -- a day on which the worst stock market tumble of the last several years is happening, and the investment adviser he's thinking of hiring is in a casino!' (Just in case you're starting to wonder about my sanity as well, I was on a 24-hour retreat with a group of business presidents, and my staff of traders and financial planners was very much on top of the market.)
This got me to thinking about the parallels between gambling and money management. Many people like to think that investing in the stock market is just as risky as gambling. This comes from a feeling of having no personal control over one's financial outcome, the fear that the 'experts' have the odds stacked in their favor, and the tendency, after a loss, to want to 'double-down' or run for the exits, depending on your temperament. However, the two are extremely different in terms of odds. Gamblers who play perfectly can generally get to about 49% odds in their favor. If one counts cards in blackjack, and plays perfect strategy, they might get to 51-52% odds in their favor. The odds are about 30% the way most people play, in my estimation. In other words, you're virtually guaranteed to deplete your wealth given enough time.
The stock market, by contrast, grows wealth. The market goes up roughly 60% of all trading days. And over the last thirty-five years, the $200 I was willing to lose at the blackjack table would've grown to about $20,000 using a portfolio of index funds I tested. Hardly 'house odds'. Even investors who trade much too often grow their money, albeit much more slowly than the market benchmarks.
But where the two activities are most similar is in the human mind. Both gambling and investing prey upon our craving and greed, on the one hand, and our aversion and fear, on the other. When things are going well, the mind tends to project that positive experience out into the infinite future. 'I've won three hands at blackjack, this is my lucky day and things are going to keep going my way.' Our heart rate quickens, our eyes widen, and we eagerly look forward to the next hand, cast of the die, or pull on the slot machine. With investing, it's quite similar for most investors who haven't become students of the mind. 'I've made so much money in these rising markets lately, I'm going to be able to remodel the house about two years earlier than I thought.' Let's sell out of that lackluster timeshare and put it into Apple Computer.
And with disappointing results, the mind projects negativity out into the infinite future, believing that impending ruin is at hand. Either way, we are caught by a very primal part of the human brain which is hardwired to avoid threats and seek pleasure. This is why so many of us feel like our very survival is threatened when we have a negative financial experience. To the objective observer, we're usually very far from such a threat actually coming to pass. It's also why some of us feel euphoric when things are going our way, however we define that term, a definition which is particular to our money type.
The great challenge is to look beyond the mind's initial reactions when faced with real-life financial decisions. As you can see from the data presented above, investing couldn't be more different than gambling in terms of its implications for our future, and yet the mind treats them as very similar. No matter what your relationship to gambling and investing are, what are the ways in which your craving and aversion are leading you astray in your financial life?
Brent Kessel is the author of the HarperCollins book, It's Not About the Money (forthcoming April 1st), and the co-founder of Abacus, one of the nation's top sustainable investing firms. Brent is teaching his It's Not About the Money workshop over Easter weekend at Kripalu.