The Psychology Behind Market Betting (and Why it Fails)

Some people say investing and gambling are two sides of the same coin—after all, both activities entail taking on some form of risk for financial gain. With the news that CME and FanDuel plan to collaborate to let users bet on market-related events, gambling and investing may seem more intertwined than ever.

But odds are this collaboration will do little for you, except empty your pockets.

To be clear, investing and gambling are not the same for a variety of reasons. One major distinction is that investors have access to relevant information that can help them make decisions. For example, Morningstar publishes stock ratings based on criteria such as a company’s competitive advantages, cash flow, debt, and leadership. Morningstar does not publish ratings of which number to bet on at the roulette table because there are no criteria that could help you make an informed decision (outside of whether the wheel was rigged).

Ironically, though, this difference between investing and gambling may make people feel more confident in betting on the markets. After all, if I can make informed decisions about the market, then my gamble on it becomes more akin to investing, right?

Not quite. Though we can make informed investing decisions, the truth is that we have a variety of cognitive biases that make us very bad at predicting what the market will do. We place too much weight on events that easily come to mind, information that confirms our preexisting beliefs, and what others are doing. When it comes to investing, we have things like portfolio diversification and a long time horizon that can help mitigate the effects of our mistakes, but with a “yes-no” gamble on what the market will do on a given day, each mistake is total and cannot be recouped.

What’s more, our cognitive biases can keep us hooked on gambling. For example, we have the tendency to believe that the probability of a future event can be influenced by previous outcomes (think of those times, you changed which answer you circled on a test because you thought there was no way the right answer could be C for the fourth time in a row!). This bias is fittingly called the gambler’s fallacy, and it can encourage to keep placing bets when we lose because surely a win must be right around the corner.

I’m sure plenty will remain skeptical of my warning. Perhaps you feel you are better at understanding the markets than the average bear because you kept your head amid the volatility following the announcement of tariffs back in April and stayed invested.

If that’s you, let’s do an experiment before you place any bets on the market. The next time market volatility strikes, I want you to write down how low you predict the market will go and how long you expect the market to stay down. When the market recovers, review your predictions. Were you right? Were you even close?

I bet you won’t be, and hopefully, you will take the money you wanted to use to gamble and invest it instead.