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Bob and RT'rs:
Not to quibble too much, but risk is NOT fixed in poker, it is quite
similar to trading in that risk levels "vary" over the course of
a hand, and real-time decisions on taking on new risks must be made
(whether to fold, call or raise/re-raise?). (Obviously
the analogy is much less than perfect; getting out in poker always
means a loss, but in trading there is an "exit with profit" strategy
component as well). The analogy is even better with no-limit
poker, where risk levels can vary tremendously in the course of a hand.
As for black-box systems, playing winning blackjack via a card counting
system is completely mechanical, in fact when you get good it gets
kindof boring if you play for hours and hours. If you're playing correctly,
your play NEVER varies based on the count, the dealer up card, and your
cards. A computer can easily be taught to play "perfectly" (if it could
"read" the cards exposed). Such a black box only differs from a good
mechanical trading system in one critical way: in the blackjack case,
we have mathmatical certainty of our edge over the house. In the trading
system, we don't, because the odds are based on a historic sample, AND
because the underlying distribution of expected results changes as market
behavior changes (whereas the rules of blackjack don't change while you
are playing). In both cases, we don't have the "best possible" edge
over the house; there are always more complete and complex counting
systems that have slightly better long term results, and of course we
never have a "best possible" mechanical trading system.
The beauty (or horror) of both is that they eliminate human judgement from
the game.
Regarding definitions: I think we have to differentiate between social
definitions and "precise" definitions of "gambling", "trading", and
"investing".
Socially, "gambling" mostly means betting on losing games (casino games),
and usually is done for entertainment (socially okay) or for compulsive
reasons ("illness"). "Trading" and "speculating" probably have highly
variable social meanings, but I'd guess that most view them as closer to
"gambling", for the reason that most assume we who trade don't really know
the odds, it's probably a losers game, and we traders are generally losers,
just like "gamblers". (How close is this definition to the truth?)
The social meaning of "investing" is "buying something that should
appreciate in value, holding it for a long time, and eventually cashing in",
and includes "buying something that will appreciate and provide personal
value while held...", i.e., real estate, art, etcetera.
At a precise level, they are identical: risking something (money or
other material goods) in order to get a positive return (more money or
material goods). That's how I view it, anyway.
If we remove the "money or material goods" refinement, and we view life
as composed of long string of decisions, I think we get the following:
Trading = Gambling = Speculation = Investment = Life
Every decision in life is a balancing of risk versus gain of one type or
another. "Investing" in a long-term relationship is a simple example of
this; deciding whether to eat at McDonalds or a fancy French restaurant is
another. Every decision is a trading decision.
A little out there, I know!
-Kevin
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