How does gambling (like buying a lottery ticket) differ from investing?

Question

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?

Answer 1

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%.

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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.

Answer 2

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).

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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).

Answer 3

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.

Answer 4

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.

Answer 5

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'.

Answer 6

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.

Answer 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).

Answer 8

Another mathematical distinction:

Most gambling is a negative sum game for everyone but the house, since the house skims a percentage off the top. The average player loses money slowly (in a casino) or rapidly (in a 50/50 lottery), but the long-term average is indeed a loss.

If there is no house -- weekly poker game with friends -- it's zero sum; no more money can leave the table than was brought in.

Investing is a positive sum game. Because companies produce profit, value is returned to the investors, and if you aren't churning your investments the fees taken by the market are less than that. The average investor should get close to "market rate of return" (usually quoted as 8%). This used to be more obvious when more companies paid significant dividends.

In both, an individual may do better or worse than the average, of course. And there is some luck involved. But given that it is possible to get market rate of return with very little effort or knowledge, I would call that a huge difference.

Answer 9

The difference between gambling and investing is the amount of money, the risk and expected outcome, and psychological effects.

In investing, you take a significant amount of money and hand it to someone who promises that you likely will get back a bit more in the future. You might invest $10,000 hoping that next year you will get $11,000 if you are lucky, $10,500 if you are less lucky, $10,000 if you are unlucky, and $9,500 if you are really unlucky. You would be in some trouble if your investment disappeared, but that is unlikely to happen.

Then there is playing. Every week I buy a lottery ticket. My company had a competition betting who would win the football world cup. You do that mostly for fun. Losing everything is expected, winning is a nice surprise. For many people buying a lottery ticket means buying the hope to be a millionaire next week, when they expect they can never achieve that through wor and don't want to achieve it through crime. If that hope is worth $2 to you, then buying hope for just $2 a week seems an excellent deal.

Then there is gambling. There are harmless forms. Go to a casino and enjoy yourself. You know you are going to lose. Look at it like going to the movies or a meal: You know you will come back home with less money than you left. As long as you enjoy yourself, that's fine. That's what money is there for, to enjoy yourself.

And then there is addicted gambling. That's people who lose more gambling than they can afford. Who don't actually enjoy it but suffer psychologically if they don't gamble. (I know someone in his early 70s who still works so he can take his pay and go straight to the bookies. He can't stop working because then he has to stop gambling).

Answer 10

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.

Answer 11

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]