Investment, Speculation and Gambling, What is the Difference?

investment-speculation-and-gambling-what-is-the-differenceREADERS must be curious to know the reason behind the strange title of this chapter. I am sure you must be wondering why should I be interested in discussing speculation and gambling in a website on investment.The reason is simple. The sidetracking of investors into speculation and even gambling is the worst enemy of good investment. In order not to become side-tracked, we must first understand what is the difference between investment and the other two related but undersirable activities. Did the great military strategist, Sun Tzu, not state in his article The Art Of War:
“Know yourself and your enemy, and you will win all battles”.
By knowing what constitutes speculation and gambling, we can then attempt to avoid falling into these traps.
The main difference between these three activities lies in what statisticians call the “ex ante probability of obtaining “a reasonable “return” from each of them. By “ex ante probability of obtaining a return”, statisticians mean the ‘likelihood of obtaining a reasonable return which ts known at the time when each of these three activities is carried out’. The ex ante probability of making a reasonable return on each of these three activities can be seen below.

                              INVESTMENT      SPECULATION         GAMBLING

Bit-Ante                       Good                   Uncertain                  Negative
Probability
Of Return

What this means is that we are fairly confident that we can make a reasonable amount of money by making a true investment; we are uncertain as to whether we can make money from speculation but we are sure that we will lose money by gambling. However, in order to be able to explain how and why the ex ante probabilities for these three activities differ, some simple concepts of the science of statistics have to be introduced. At this point, many of you may say to yourself: ‘I am not continuing with this article.


Learning about statistics seems like an impossibly difficult task !. Let me ask for a little patience and ask you to bear with me for a while. The statistical concepts to be introduced are very easy to grasp and one should have no difficulty in understanding these basic concepts which are vital to the understanding of the rest of this article.

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