Color me confused, but I’ve never really understood the difference between a bet and “financial trade.” And if there ever really was a line, it’s definitely becoming blurrier.
In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south — and this hasn’t raised an eyebrow. But when an Aussie bookie began offering bets on whether the Australian economy is headed for recession, he stirred up a bit of strife.
Federal Treasurer Wayne Swan called the bookie’s actions “utterly irresponsible.”
The contrast between the Treasurer’s response to financial trades and bookies’ bets provides a nice example of how people respond differently, depending on how a bet is framed. One is modern finance, while the other is a repugnant market. Both, of course, are simply state-contingent contracts.
But I’m also confused for another reason. The Aussie economy is now a strong odds-on favorite to slide into recession. In fact, if you are betting on a recession, you would have to bet $5 just to stand a chance to win $1. But after its recent interest rate adjustments, the Reserve Bank of Australia declared that the “size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer.” That’s antipodean boffin-speak for: there’s no more interest-rate cuts to come for at least a couple of months.
Put the facts together: Despite a near-certain recession, the Aussies are leaving interest rates at 4.25 percent. Are the reserve bankers content to stand by as the recession wreaks havoc, or are they simply confident that they are smarter than the punters? Either way, I’m worried.
By the way, a few years back, Refet Gurkaynak and I studied a related betting financial market run in the U.S., and we found that its economic forecasts were typically more accurate than the consensus drawn from expert economists.
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I’m fairly certain that a collection of second graders throwing darts at a data-set generally have more predictive power than a group of economists.
The difference that I would see is that options markets are orderly and cleared through a centralized clearing house where members essentially insure the settlement of transactions. I don’t think people’s moral outrage is at the idea of betting on a given event but instead all of the attached vices that come along with most unregulated betting circles (drugs, the mob, etc…). Clearing houses also tend not to break your legs if you fail to meet a margin call, which has positive ramifications for society. At least in most cases.
I think the difference is that with financial trading the economy can grow so there’s a positive expected value when making a transaction.
With betting (and prediction markets) it’s a zero-sum game with a bit taken off the top so there’s a negative expected value.
I think the primary difference is regulation. Participants and market makers in the financial markets have a number of strict regulations that gambling does not. Financial market regulation is trying to protect the economy. Gambling has its own set of regulations, but those are mostly focused on fairness.
I wonder if there is already overlap between the areas that are supposedly covered. How long until the SEC starts regulating the craps tables in Vegas?
The very fact that Federal Treasurer Wayne Swan is clueless enough to call the bookie’s actions “utterly irresponsible” does not bode well for the Australian economy.
There’s not much difference in many things, but we agree to agree that they are different. If I print money it’s called counterfeit, if the government prints it, some mystical thing makes it okay. That is called civilization.
I have never understood how options weren’t illegal gambling, since they are not based on anything of underlying value being traded.
I have also realized that there really isn’t any difference between prostitution and any other form of employment requiring unpleasant or difficult physical labor. We pay professional athletes to do many things with their bodies, some of which may produce a lasting injury or even death, and to do it in public before an audience.
We pay crab fisherman to work in arctic conditions with imminent danger. We don’t usually film it, but when we do it’s a hit series.
We pay nurses and nursing assistants to perform all sorts of the most intimate personal care on strangers. Things I hope never to have to do for my husband!
We pay all manner of people to do things with their bodies which are unpleasant (like slaughtering fowl), painful, or risk danger or disease. Why is only prostitution illegal?
Tucker: the falling AU$ isn’t a big deal; it was lower in the past and we got by just fine. A lower AU$ helps our exporters at a time when commodity prices are falling, which is a good thing; in theory, it makes imported consumer goods more expensive, but last time the dollar slipped this low, that didn’t occur. Instead, the country’s retailers ate the difference in their margins, and prices stayed pretty much the same.
denis bider: Wayne Swan knows perfectly well that he was talking rubbish. His remarks were just a peculiarly Australian form of media management.
Echoing WB, I have always been baffled by these artificial divisions between acceptable and unacceptable forms of labor and speculation.
The one that gets me is insurance- what is it, after all, other than a wager that a certain event will or won’t occur? Show me an actuarial and I will show you a white-collar bookie.