One is ruled by luck, the other by strategy, but both can bring you financial success. However, we would not encourage you to rely on luck to settle for pension, but it is definitely needed if you want to have that extra leverage against the odds.
Whether you are spinning a slot reel with a no deposit bonus or investing in a diversified ETF portfolio, one truth persists: managing risk is the cornerstone of long-term success. The principles of risk hedging, bankroll management, and maximizing ROI intersect in both scenarios. We want to explore the psychology and strategy behind finding the right balance between risk and reward both in gambling and investing.
The Foundations of Risk
If you consider gambling and investing to be polar opposites, you might be extremely wrong. Obviously, the first one is typically viewed as entertainment, with random systems and games of chance being the core pillars of the system. The other is all about building long-term wealth and fighting against inflation while trying to conserve the value of your investments.
Even with these considerations, gambling and investment have some core common characteristics:
- You will have to face uncertainty both when investing and gambling your money. The small difference between them is that in gambling, you will be aware of the outcomes much faster.
- Both investing and gambling are governed by probability, so make sure you always have a safety net to fall into.
- You have to start with an initial bankroll.
- Do not rely on free bonus no deposit offers to increase your chances of becoming profitable. They may come in handy, but they are also part of marketing strategies that casinos use to increase their player base.
- The main goal is to achieve a high ROI (Return on Investment).
- In both gambling and investing, you are in a constant exchange of risk and reward.
- It is almost impossible not to get emotionally involved.
Professional tip: The main differentiator lies in EV (Expected Value). Casino games and gambling in general have negative expected value due to their nature of giving you negative long-term chances from the beginning. In investment markets, the long-term EV is mainly positive.
Managing Your Bankroll As Your Life Would Depend On It
Gambling
It is vital for your growth to be aware of how much you spend, at what pace, and how this can translate into future actions. Without full control over your bankroll, you cannot think about being successful. You must keep track of your financial decisions, their outcomes and use them as base for future calls.
If you want to think of a possible strategy that can be applied to betting and gambling, you should start researching the Kelly Criterion. It is a formula developed by John Kelly Jr, a scientist at AT&T’s Bell Laboratories.
In order for an individual to use this formula, he or she would need to find out the probability of the bet having a positive return and the win/loss ratio. You can easily find information and the actual Kelly Criterion formula online to guide yourself and understand its applications.
Basically, having a betting strategy that would tell you how much of your bankroll to bet is the only strategy you can apply, hoping that it would eventually help you achieve profit. At the same time, you should also understand that wagering requirements are drastically reducing your long-term leverage. Playing volatile games can also reduce predictability, and gambling without loss and win limits can certainly lead to losing temper or impulsive actions.
Investing
Investing offers more stability, and the general rule is that if you do it for long enough, it has a high rate of success. Consistency is the key, and we will describe in-depth some of the key strategies investors implement in their daily strategies.
If you are still a beginner but eager to start, document yourself on asset allocation, portfolio diversification, and risk. Harry Markowitz developed the Modern Portfolio Theory in 1952, teaching that an investor should not focus only on one asset but diversify his portfolio to minimize unsystematic risk.
One core strategy we would like to discuss is also the most vital for successful investing. DCA, or dollar cost averaging, basically translates to regularly investing the same amount of money regardless of market conditions, prices, economic situation whatsoever.
The Psychology Behind Risk
Consciously knowing that you just took a risk on a bet or investment triggers your brain in ways you wouldn’t even imagine. While dopamine and serotonin secretions are part of a different discussion, we have three distinct scenarios for you to analyze that perfectly picture what happens with your actions when you lose control of your emotions when involved in gambling or investing actions.
Overconfidence Bias
Being overconfident contradicts the simple rule of following mathematic strategies. If you managed to score a big win in the casino or your trade from last week concluded with a huge ROI, you will start to feel overconfident and have a false perception that you finally got it and nothing can stop you.
This thinking leads to biased decisions and potentially financial ruin.
The Gambler’s Fallacy
This is the false impression or the action of lying to yourself that you will eventually win no matter how much you have lost so far. For instance, a gambler may think that after 20 lost spins, he should deposit more because it is time for the machine to pay him back, which is completely false.
Loss Aversion
When we lose, that feeling is twice as intense as an equivalent gain or win. Basically, losing money will always have bigger effects on your emotions and psychological state than winning.
Final Thoughts
The thing you should remember is that both gambling and investing require risk management. Simultaneously, you must be in control of your emotions and understand them, be aware of the probabilities and strategize your decisions.
