Risk Markets And Politics

Friday, June 17, 2005

Hedgers vs. Bettors

Commentary in a recent FT claims that New York is falling behind London "in an arena of financial innovation that is rapidly converging with other forms of trading and investment", "gaming and betting sites." The article implies that America's relatively puritanical sense of morality is hampering the development of new markets.

What are the root causes, the genealogy of, the moral imperative against gambling? Perhaps Onanism, wasting otherwise productive resources and time? Likewise, gambling is seen as a stepping stone to other indulgent behaviors, not in alignment with "family values." But will moralist concerns actually threaten the development of online markets in the US? If so, the question becomes: "what is the clear line between hedging and betting?"

The article goes on to suggest a dilemma:
"It is easy to imagine, for example, home-owners or lenders placing bets on the future level of a house price index in order to protect themselves against potential loss. Would that be betting or financial hedging?"

At first, the answer seems clear. It is hedging so long as the home-owner sells the price index. If he buys the index, or if someone with no prior interest in real estate buys or sells it, that is betting. It comes down to pushing-away risk vs. taking it on, or decreasing the expected variance in your future wealth vs. increasing the volatility of expected well-being. The market will necessarily contain a mix of these types of actors and actions, but this is no different from any other mature financial market.

Now, some markets will by nature contain a higher percentage of bettors, in some cases nearly 100%. Sports gambling falls into this category. I suppose that some gamblers bet against their favorite team and this could very tenuously be considered as a hedge, though immaterial. There is also the entertainment value of participating in the market, and I dare say this is also no different from any other mature financial market! When market participation has some kind of immaterial "use" value, this does in fact blur the distinction between hedging and betting, but not critically so I think. Markets that allow participants to hedge pre-existing material risks should have no moralist legislative risk in any case.


  • The prevention of underage gambling and identifying and helping problem gamblers is a core objective in running an integrity driven online gambling operation. Gambling at blackjack, or any other online gambling game for that matter is a great form of leisure and entertainment, but for some it can potentially be dangerous.

    By Blogger mikeelikesit, at 10:40 AM  

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