A recent interesting article by Ariel Rubinstein entitled “Digital Sodom” (in Hebrew) argues that certain forms of futures trading (and Internet sites where these forms of trading take place) are essentially gambling activities.
The issue of “what is gambling” is very intereting. In an earlier post entitled “Chess can be a game of luck” the interesting question regarding “games of luck” and “games of skill” was discussed. It was argued that for a betting game, if, over time, for all players (or even for most players), the expected gains are negative, then we can regard the game as primarily a game of luck. (The claim is that this is a reasonable interpretation of the current law, even if not the only possible interpretation.)
In some more detail, the following definition was examined in the previous post:
A game of luck is a betting game where the short-term outcomes depend on luck and the participants bet in spite of being able to rationally conclude that their expected returns are negative. A betting game is primarily a game of luck if this definition applies to most bets in the game.
When we consider various investments in stock futures, and the Internet sites to which Ariel Rubinstein refers, the first question to ask is how broadly we should understand the term “betting games”. (In some places, laws about gambling specifically exclude stock market activity.) It is not clear if these futures-trading should be considered “betting games” or rather platforms for investment. (Rubinstein’s article made a compelling case that they are essentially platforms for gambling.) One comment that we can make is that, under usual economic assumptions, an investement platform that yields, over time, negative revenues for most participants will go out of business… unless, unless the participants’ motivation for playing comes from an irrational belief that they can win or from a love of gambling.
Update: This post is related to Arrow’s third puzzle from the post on Arrow’s economics. Arrow’s question was: Futures trading in foreign currencies can be explained by agents involved in international trade wanting to reduce their risk. This suggests that the volume of currency futures trading should be below the volume of international trade. Yet currency futures trading is 300 times larger. What can explain this phenomenon?