The American journalist and poet Ambrose Bierce wrote in his 1906 satire The Devil’s Dictionary that “the gambling known as business looks with severe disfavour on the business known as gambling”.
That phrase has a particular ring of truth about it when one starts to think about the “casino banking” that caused the financial crisis almost ten years ago. But that term was – and still is – a slur on casinos. If the financial services industry was as well-regulated and as well understood as the gambling industry, the financial collapse may have been avoided.
At the root of all financial bubbles, scams and scandals is the self-proclaimed “professionalism” of the financial sector – what Nobel Prize-winning economist Freidrick von Hayek referred to as “the pretence of knowledge”.
Von Hayek admitted to the futility of trying to make economics “scientific” in the accepted sense of the word. Like any profession, the financial sector seeks to clothe its “pretence of knowledge” in the language it uses to distract its customers from recognising that it is simply an arm of the gambling industry. Substitute betting jargon for finance-speak and the reality becomes clearer. The majority of actions in the finance sector are bets. Professionalism and distraction
The finance sector has a vested interest in dissociating itself from the gambling industry itself. In his book, The Poker Face of Wall Street, finance expert Aaron Brown said:
Gambling lies at the heart of economic ideas and institutions, no matter how uncomfortable many people in the financial industry are with the idea.
Indeed, in the immediate aftermath of Tulipmania (the manic buying of tulips and the ridiculous prices they achieved in the mid 17th-century Netherlands) the courts refused to rule in favour of sellers trying to enforce contracts for sale on the grounds that it was a “gambling operation”.
Bluffing and confidence
Not only are the games of finance and gambling incredibly alike but the skill sets are virtually identical, too. Skills that define successful traders, such as a cold-blooded approach toward risk, speedy decision-making under pressure, discipline and a well-trained memory, are the same ones that separate elite poker players from the rest. Brandon Adams, a professional card player who has also taught a class in behavioural finance at Harvard, argued that some of the best traders are professional online card players.
Two of the key elements of gambling – bullying and bluffing – are the subjects of recent research by Nobel Laureate, Robert Shiller. In his book, Phishing for Phools, he delivers a fundamental challenge to the efficient market (EMT) theorists who claim that you “can’t beat the market” by arguing that as long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception.
Central to any manipulation and deception is the role played by confidence and its dangerous partner, overconfidence. In another book, Animal Spirits, Shiller proposed five key psychological factors – the most important of which is confidence (or lack of it) in the economy and one’s personal place in it. The problem is that while confidence is essential to raise the billions needed to fuel modern industry, it is also an essential tool with which to fool naïve investors.
Financial advisors – or “tipsters” in gambling vernacular – understand that confidence is the key to gaining a customer’s trust. Tipsters, financial advisors, wealth managers, fund managers – all understand and depend on our basic need to trust each other, and them.
Advisors, tipsters and trust
Professor of Economics Paul Seabright believes that the need to trust has evolved in the modern economy to such a point that “people give complete strangers sums of money they would not dream of entrusting to their next door neighbours”. They do this because “professionals” have acquired prestige, power and wealth by “owning” knowledge and expertise and then selling it. This creates a dependency and a “pretence of knowledge”, Seabright says. As such, the customer believes in the expertise of the “professional” without question.
But once the language becomes real and “advisors” are recognised as “tipsters”, then the transactions become demystified. These financial “tipsters” want you to give them your money to bet with. They want to charge you a “management” fee to bet with your money then they want a percentage of any profit made on that bet. If the bet loses then that is, of course, down to you.
If people understand that this is what they are buying and they choose to listen to other people gambling with their money (on horses, football or stocks and shares) then so be it. But many people who gamble just don’t get it and that is what is dangerous. As long as the financial sector is not understood for what it is – “the gambling known as business” – then financial scams and banking scandals will continue.