Each morning I wake up, shave, gather my gym clothes and hop on a Manhattan-bound F train.  As I walk the three blocks from the subway to the gym, I always pass the same sights.  Up and to the left I see the top of the Empire State Building, to the right I see the store that boasts "home of the original Soup Nazi" and straight ahead I see a towering vertically-oriented neon sign, hanging onto the side of a derelict building.  The sign is trying to say "Off Track Betting," but many of the neon bulbs are black and burned out.

When I pass this neon sign, I find myself wondering, what kind of people go to this place? Although it’s possible that I’m wrong, my gut tells me that the old broken down betting establishment on West 38th Street is not a very happy place.  I imagine that the decor inside is moldy, old and unfriendly.  There may even be bulletproof glass separating the patrons from the employees.

Contrast this downtrodden image with the grandeur of Wall Street. Large glass buildings polished to a mirror finish. Enormous lobbies with suited security officers, metal detectors and bomb detecting dogs.

On the exterior, it would be hard for one to think of two places more different from each other.

However, save for the glitz and glamour, really how different are these businesses? Both Wall Street banks and the OTB facility allow for people to make bets that amount to zero sum wagers.  Regardless of whether these bets are placed on West 38th Street or Wall Street, they both end the same way: money changes hands, but no value is created.

It’s true that banks do provide many legitimately valuable services.  They lend money to entrepreneurs and businesses and give mortgages to people who want to buy homes.  However, in addition to these "traditional” banking activities, some Wall Street transactions amount to little more than a horse-gamble.

The reason gambling is illegal in most states is because it provides no real value creation.  If gambling were fully legal, there would be a huge opportunity cost to society. With all of the time people spend gambling, they could be doing things that are productive, rather than just swapping their money back and forth for sport.

What if gambling on financial securities was held to the same regulations as gambling at a casino?   Imagine all the things that Wall Street bankers could accomplish if it was no longer legal for them to spend their days making bets against each other.

If gambling on Wall Street were illegal, it would no doubt lower the profits and salaries of Wall Street firms. But would that be bad? Perhaps if this were the case, the top engineers and scientists from top universities would no longer be lured away from a life of socially productive work by sky high salaries and a corner office.

What do you think?

Gambling – Uptown and Downtown
  • Heathen!

    How dare you say that the industry that takes 40% of ALL US corporate profits isn’t adding value!

    Realistically, there is a difference. The theory behind finance is that each player in the market increases the cumulative amount of information available, thus every action – however minor, or improbable – increases the extent to which valuation reflects reality.

    Gambling on horse races doesn’t much more than the gamblers; the stock market affects the allocation of capital in, say, new and emerging markets. The amount of money that new companies can attract, at good rates, has something to do with the degree of competitiveness in that market. More competitive markets are good for society, so an improved allocation of capital towards those ends is a good thing.

    Even improbable bets can be good, as long as the expected value across all such bets is non-negative.

    In practice, this isn’t the case. Indeed, the very existence of things called “bubbles” makes that kind of thinking sort of …silly.

    Additionally, the cost of finance – in taxpayer money used to back finance firms, but more importantly, in the opportunity cost of lost wealth caused by finance’s contribution to the recession – probably more than outweighs any positive contribution based on marginal increases in effeciency.

    After all, it doesn’t seem like it’s 20 times easier to start a business now than 50 years ago, does it? If anything, the scaling back of various government programs that supported small business means it’s been made more difficult over the past few decades.

    And, as you note, bright people are attracted to finance as opposed to more socially productive ends. Ideally, salaries would depend partly on how socially productive people are (take the positive or negative externality and add it to the salary). Alas, this doesn’t happen; as a consequence, America is suffering relative to Europe and China. We’ve been losing our (considerable) lead in research and development for years, and there’s no guarantee we’ll be able to get them back.