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Gambling and Entrepreneurship: Never the Twain Should Meet

Gary North
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Dec. 19, 2011

I read James Altucher's article about how he gambled for 365 consecutive nights. It's a lively article, as all of his are. It has some good insights. And, like all of his articles, it is not what I would call a carefully structured, well-thought-out exercise. It is a combination of "dear diary," "really dumb things I have done," and "street smart hot-shot shares his money-making secrets." An Altucher essay is like a bag with about ten shiny stones in it -- diamonds mixed with rhinestones -- which he dumps onto the floor to cause some excitement. Grab the ones you think look good, but be ready to toss out the ones that can't cut it.

He compares gambling to life. That is an old theme. The best presentation is still the country song, The Gambler. I can remember where I was -- approximately -- when I heard it first. I was driving to Pennsylvania. I thought it was the greatest country song I had ever heard, better even than The Long Black Veil. I still do. It was clever, insightful, musically terrific -- and dead wrong (aces over eights). Yet I keep coming back to its chorus. It seems inescapable. "You've got to know when to hold 'em. . . . "

The best short discussion of the difference between gambling and entrepreneurship I have ever read is in Murray Rothbard's Man, Economy, and State (1962).

It is not accurate to apply terms like "gambling" or "betting" to situations either of risk or of uncertainty. These terms have unfavorable emotional implications, and for this reason: they refer to situations where new risks or uncertainties are created for the enjoyment of the uncertainties themselves. Gambling on the throw of the dice and betting on horse races are examples of the deliberate creation by the bettor or gambler of new uncertainties which otherwise would not have existed. The entrepreneur, on the other hand, is not creating uncertainties for the fun of it. On the contrary, he tries to reduce them as much as possible. The uncertainties he confronts are already inherent in the market situation, indeed in the nature of human action; someone must deal with them, and he is the most skilled or willing candidate. In the same way, an operator of a gambling establishment or of a race track is not creating new risks; he is an entrepreneur trying to judge the situation on the market, and neither a gambler nor a bettor.


Gambling is always a statistically rigged zero-sum game. It is rigged, because the house wins statistically. It is zero sum, because the winners profit at the expense of the losers. Finally, it is a game: played for its own sake. It adds losses where none had existed.

The free market is not rigged to favor the house. There is no "house." It is not zero-sum. It is not a game. It is an arrangement in which people get together to benefit themselves as individuals. But the benefits are not matched by losses except when fraud is involved, which the is illegal. Both parties expect to benefit from a transaction. The potential gains are open-ended. The losses can be limited by contract by a limited liability clause if the parties agree. The arrangement is inherently win-win.

Because both profits and losses are open-ended, mathematics has only limited application. Math can mitigate some kinds of losses through insurance contracts, but only where there are classes of repeating events, such as death or fires. Uncertainty -- the only source of entrepreneurial profit or loss -- is unknown. Math plays no role here. The law of large numbers does not apply to individual ventures.

The entrepreneur acts to reduce uncertainty. He does not play a game. He does win at someone else's expense: a rival entrepreneur who did not perceive the opportunity. His customer is not his victim. The customer is his beneficiary. He solves other people's problems in innovative ways.

Some of modern economics is based on game theory. The pioneer was the mathematician, John Von Neumann. He wrote a book with a former student of Ludwig von Mises, Oskar Morgenstern: Theory of Games and Economic Behavior (1944). It was important enough to get its own Wiki entry: http://en.wikipedia.org/wiki/Theory_of_Games_and_Economic_Behavior. It was dead wrong, and all economic theories built on it are wrong. Why? Because the free market is not a zero-sum game. Rothbard had it right in 1962:

Recently, theories of "games" and strategy have been erroneously applied to market activity, even to the absurd extent of comparing market exchange with a "zero-sum game"--an interrelation in which A's loss is precisely equal to B's gain.

In 1956, in a classic essay, "Toward a Reconstruction of Utility and Welfare Economics," Rothbard had warned against this approach.

It is precisely and only in lotteries that probability theory can be applied. The theorists beg the entire question of its applicability to general human action by confining their discussion to lottery cases. For the purchaser of a lottery ticket knows only that the individual lottery ticket is a member of a certain-sized class of tickets. The entrepreneur, in making his decisions, is on the contrary confronted with unique cases about which he has some knowledge and which have only limited parallelism to other cases.

The free market is not like a game. Life is not like a game. The free market enables us to solve existing problems by constant cooperation. It does not impose problems for their own sake, for either "fun and profit" or "misery and loss."

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