I recently took a few days break to Las Vegas with my wife Rebecca. Although this was not my first time in Vegas and I don’t gamble, it still amazes me when I watch people gamble and observe their behaviour towards risk. Spend an hour or two in a casino and you will see people feeding money into three slot machines at the same time. Crowds will gather around the craps table and people will risk big money on the roll of the dice. In case you hit a cold streak and run out of money, you can visit one of the conveniently located ATMs.

Psychology behind gambling

I have my own theories on why so many people like to gamble. What motivates one person to gamble may not be the same reason why another person chooses to gamble. Gamblers may have more than one reason for engaging in such risky behaviour. Over time, a person’s reasons for putting money at risk can change.

Human nature is such that we feel good when we win. We are taught from an early age that you have to try new things and take chances in order to get the most out of life. In a sense, we are betting that we are making the right choice every time we make a decision. Some decisions are easy and some decisions are difficult.

Whether you go into a casino, play the stock market, or bet on football games, you are taking a gamble. Why do some people jump out of airplanes or swim with the sharks? Why do some people always follow the same routine? People make choices based on their tolerance for risk. Those willing to take the biggest risks can earn the biggest rewards. Those willing to take the biggest risks are often the biggest losers. People are driven to gamble by emotion and the chance to beat the odds.

  • Gambling is exciting
  • Winning gives you a rush
  • Gambling is entertainment just like going to the movies or an amusement park
  • You are in control of your own destiny
  • Casinos make you feel special when you play
  • You can change your life with one lucky spin of the wheel
  • Gambling can be an act of desperation

Vegas vs. the stock market

For most people, losing money in a Las Vegas casino is not nearly as bad as watching the shares in their portfolio drop in value. If you go to Vegas, you almost expect to lose. You might take a couple of hundred or a couple of thousand dollars to gamble, and if you lose it all, you will still remember the free drinks you were served. When you buyshares, you are basing your purchase decision on facts or at least a good story. Most visitors to Vegas are casual gamblers and do not go just to win money. They are there as much for the experience as the possibility of returning home with more money than when they left home. Money is money, but money you need to buy a new home or send your kids to university should be invested in the stock market and not gambled in Las Vegas.

I can understand why so many investors get so stressed out when there is volatility in the market. Unlike gamblers who have a prepared-to-lose mentality, investors get nervous when they see the balances in their portfolios decline. They depend on that money for real needs. If the value of their shares should go down, it may disrupt near-term plans such as buying a house. Concern can turn to panic if a person is nearing retirement and sees a substantial drop in the value of their investments in a pension.

For most investors, we at deVere Group would suggest that the best strategy to follow is to create a balanced and diversified portfolio. Diversification helps lessen risk in volatile markets. A balanced portfolio is important because it allows you to allocate different types of investments that will best target your financial goals. Growth of capital is usually the goal of young investors who have a long-term investment horizon. Individuals who are nearing retirement age are usually more interested in preserving capital and generating income. Depending upon your stage in life, you may want to shift the balance of your investments more aggressively toward growth or take a more conservative approach and increase the percentage of income-oriented investments in your portfolio.

Ups and downs in the market are like winning and losing streaks in Vegas. Sometimes you’re hot and sometimes you’re not. No matter whether you are putting money at risk in a casino or in the stock market, you should understand risk. How much are you willing to gamble? How much is okay to gamble?