Gary North on current economic affairs and investment marketsGary North -- Specific Answers
HomeContact MeTell a FriendText SizeSearchMember Area
Gain immediate access to all of our current articles, the question-and-answer forums, dozens of free books, and article archives. Click here for details on how to join.

About This Site
Academic Gaps
Articles
Capitalism and the Bible
Clichés of Protectionism
College Finances
Debt Management
Ellen Brown: Critique
Federal Reserve Charts
Gary North's Free Books
Get Published Here!
Gold Price & My Report
Keynes Project
Price Index (U.S.A.)
Questions for Jim Wallis
Remnant Review
Social Security/Medicare
Sustained Revival
Tea Party Economist
U.S. Debt Clock
Yield Curve
Your YouTube Channel
Gary North's Miscellany
Advertising
Blogging
Budgeting for Wealth
Business Start-Up
Career Advancement
Digital Tools
Education That Works
Evernote: Free Notes
Federal Reserve Policy
Fireproof Your Job
Goal-Setting for Success
Great Default
Inheritance Strategies
Insurance
International Investing
Investment Basics
Job and Calling
Keynesian Economics
Leadership
Marketing Case Studies
Obamanomics
Precious Metals
Real Estate
Retirement
Safe Places
State of the Economy
Stocks and Bonds
Video Channel Profits
War With Iran
Members' Free Manuals
Our Products
Contact Me
Help
Tell a Friend
Text Size
Your Account
My 100% Guarantee
Privacy Policy
Terms of Use


This site powered by MemberGate

Gambling and Entrepreneurship: Never the Twain Should Meet

Gary North
Printer-Friendly Format

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.

http://mises.org/books/mespm.pdf

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."


Printer-Friendly Format

 Tip of the Week
Sign up for my free
Tip of the Week
Verification Characters:    Type     S  7  F  D  5     here   


Tip of the week archives
On what this icon
means, and how it
can help you,
click here
 Q & A Forums
General Q&A Forum
Advertising and Resumés
Affiliates
American History Topics
Backyard Food Gardening
Banking and Politics
Blog Sites and Web Sites
Books Worth Reading
Bumper Sticker Slogans
Business Forum
Buying Smart
Christian Service Forum
College -- The Cheap Way
Copywriting
Education Alternatives
Food Storage
For Women Only
Fukushima
GNC Benefits
GNC Testimonials
Gold and Silver
Great Default Forum
Health and Diet
Health Insurance
Homeschooling
Investments Forum
Iran War
Job, Calling, and Career
Leadership Development
Legacy Building
Less Dependent Living
Local Political Action
Non-Retirement Forum
One Good Idea
Police State
Privacy
Public Speaking
Real Estate Forum
Remnant Review Forum
Safe Places Forum
Taxation Policy
Typographical Errors
Video Production Basics

 Archives
Reality Check
 Discussion Forum
Search Discussion


Recent Forum Posts
• insurance
• Foreigners Stop Buying Treasury IOU's
• Technical Analysis
• Blood Moons Tetrad
• 60 mins piece, stock market rigged! Why Invest.
• 60 mins piece, stock market rigged! Why Invest.
• Sean Hyman Absolute profits secret calendar
• Investment Portfolio - Inverse Funds
• DowJones Ind Avg is a hoax
• Digital textbooks
• Joint Venture Oil & Gas Investing
• Trading Or Gambling?
• 5 year return on investment in Stock Market
• Bottom for Mining Stocks?
• Home Equity Loan for investment
• RIch Buy Real Estate, Poor Want Gold
• HUD bringing a bit of Chicago to Dubuque
• Buying a home/ putting it in child's name
• CNNFN Rent rate tool
• proposed elimination of 1031 exchange
• Business card for real estate
• Buy rentals in NW Indiana
• Market and Timing
• Housing Advice Sought...
• Too many Eggs in one basket???
• edit
• Sit On Two Mortgages?
• Motivated sellers
• Recommendations for Pre-Approval for Mortgage?
• Rental properties in hurricane country
• Middle Class squeezed out of Chicago
• An Article on Chile
• 5 Amazing, Cheap Places to Live as an Expat
• Oil Field Job Security
• Moving to TriCities Area
• PJ ORourke on the Baby Boom
• Is Vegas DOOMED?
• Mint.com
• Second Passport- Mexico?
• Radiation dangers to US,World Confirmed
• Safety in numbers? Questions…..
• Best in Asia?
• Simple Exercise
• Coming to an airport near you ...
• S.W. New Mexico not looking so safe...
• I take it Retirement Armageddon is not available
• Post Retirement Career
• Social Security - when to start collecting
• 401K Risk
• Detroit Retirees Fight 83% Health Care Cut
• Lump Sum Early DROP
• Underfunded pensions
• 401k strategy
• Can I Avoid Medicare Entirely?
• Looking for a Financial Planner/CPA
• How to calculate retirement needs
• Two IRA questions:
• Rentals
• Why?
• Teaching in non-retirement
• Christian Nation novel
• On Law Enforcement and Government
• MC = MR: True but useless?
• Ruppert Article
• Up from Slavery
• Don't accuse customers of cheating
• Constantine's Sword: The Church and the Jews
• Money Banned
• Question about gold not being ultimate asset
• Gary has wisdom
• help finding a decent rehab center
• Rodent Congressmen
• Evernote and Moleskine team up to create smart bus
• Up Credit Limit on Card?
• New study warns on effects of wireless technology
• free service?
• How to quit my full-time job
• Fair joint ventures?
• Intern to Equity Holder
• Oil field business ideas?
• Turning Over Tables on Craigslist
• This might be crazy. Maybe not. I don't know.
• Best Ways of Starting an Online Business
• Copyright Law for Textbook Problems
• Help Needed with Music Appreciation Course
• Engineer starts rubber band braclet business
• Is my USP unappealing?
• Startup of a Daycare
• Last payment
• Employee Death