GAMBLING
Robert O. Welk RowTek Economics
PROLOGUE
During the preparation of my earlier reports on (1) what it means to be a shareholder, and (2) asking if the stock market is a casino (available in archive) it became clear that most of the activity in the financial markets is not really investing, but rather gambling. There are legitimate business reasons to buy futures, options, puts, calls, hedge funds, etc. A manufacturer that relies on a specific raw material or a farm business that will be harvesting a crop in a few months have good reasons to hold futures. Businesses will have options or futures on foreign currencies to protect accounts receivable. Even an individual may engage in some of these purchases as insurance for their portfolio of investments. But there clearly are purchases and sales of financial instruments that are pure speculation, or gambling, not business related. So-called "day traders" are not likely involved in the markets for business reasons, nor are those who buy and sell quickly.
In 2000, Dean Baker, co-Director, Center for Economic and Policy Research, wrote a paper in which he advocated a small tax of 0.25% on every financial transaction. He made the case that this tax would raise $120 billion a year in tax revenue. The small tax would be insignificant to the long term investor, but would fairly tax the entities that are causing the majority of expense in operating the financial markets. He makes the point that other forms of gambling: casinos; lotteries; race tracks; etc. are taxed at rates between 3-40%. To be fair, financial market gambling should also be taxed. (Other well known economists, Lawrence Summers and Joseph Stiglitz have also made the case for such a tax.)
There are no figures on the amount of gambling in the financial markets. In order to get a total estimate, every person or business would have to be consulted and asked the reason for their actions. The figure is unknown - but it is substantial !
The awareness of gambling in financial markets piqued my interest to explore the subject of gambling in general.
HISTORY OF GAMBLING
Gambling has occurred almost since the beginning of mankind. Archaeologists uncovered crude fashioned dice in northern Iraq and were able to date them from 3000 BC. They were made from goat and sheep bones (the astragalus bone, just above the heel bone). There were markings on all sides and clearly were meant to be "rolled". Good historical records indicate that gambling grew rapidly in the Roman empire from 2nd century BC to the sixth century AD. Many countries are credited with developing various forms of gambling. Playing cards are thought to have evolved in China at around 900 AD. They were refined in France in the 1500's to resemble the current 52-deck playing cards in use today. Other historical records indicate that there was a boom in gambling in Europe from 1650-1800. (An excellent just-released book, "Roll the Bones, The History of Gambling" by David G. Schwartz provides extensive detail on the history.)
An Italian, Girolamo Cardano, was an avid gambler in the 1500's. He took gambling seriously and applied mathematics to it. In 1663, a book that he had written, "The Book on Games of Chance", was published posthumously. This is regarded as the first published work on the theory of probability. It was the development of probability theory that led to the birth of gambling as a business: casinos; lotteries; and bookmaking. Applying probability to various forms of gambling made it possible for a business to offer honest play to all participants and for the "house" to make a profit.
Over time governments have repeatedly attempted to suppress gambling but to no avail. Ways were always found to keep it growing. The attempts to control it usually were as a result of increased crime, prostitution, and other undesirable events that were associated with gambling. Interestingly, there is not much evidence that morality was a prime concern. Judaism and Christianity over the years have not expressed a firm position on gambling. This probably is because the Bible does not specifically condone or condemn gambling. In fact, there are numerous references in the Bible where decisions were based on "casting lots". It is believed, from archaeological finds, that "lots" were actually dice like , and casting lots really meant rolling dice. (Muslims prohibit gambling as evil and sinful.) Governments and religious leaders have at times pronounced gambling as undesirable based on Puritan work ethic principles. Puritans regarded it as a waste of time where nothing useful was being created.
GAMBLING IN THE UNITED STATES
Gambling in the United States has been prevalent since the birth of the country. Lotteries were used extensively in the colonies to provide funds for major infrastructure projects and social needs. In the late 1800's and into the early 1900's gambling had been on a decline. In 1910 the only gambling of consequence was horse racing in Kentucky and Maryland. New York actually banned horse racing from 1910-1913. During the depression years bingo became quite prevalent as gambling entertainment. As of the mid-'70s Nevada was the only state that sanctioned casino gambling. In November 1976 a referendum in Atlantic City was passed to allow casino gambling there. The referendum passed, after having been defeated two years previous, because of astute marketing that promised tremendous economic benefits that would restore the city to its former glory and also create thousands of jobs. In 1989 Iowa's state government approved gambling on riverboats. Many states adjacent to the Mississippi River quickly followed. The promise of economic benefits of gambling has spread so as of 2003 only Utah and Hawaii have no legal gambling. The other 48 have authorized various kinds of gambling. Thirty-nine states have well established lotteries. Alaska, Alabama, Arkansas and North Carolina have no state lotteries. The casino interests in Nevada and Mississippi have prevented lotteries in those states.
Indian tribes had been conducting bingo games for some years. The first semblance of an Indian casino opened in 1984 in northern Michigan. The Congress recognized that Indian gambling was occurring and in 1988 passed the Indian Gaming Regulatory Act. It provided rules and regulations for gaming by tribes. The tribes were required to negotiate compacts with the state government in which they were located. The compact stated what kinds of gambling could occur and what percentage of revenues would be paid to the state. The IGRA also required that all profits from gambling be used for the common good of the tribe. More than one-half of the 280 tribes now have gambling facilities in 28 states.
In 2003 Americans lost about $75 billion on games of chance. About one-half went to casinos (commercial and Indian). Eighty percent of casino gambling revenues are from slot machines. (The slot machine was invented in 1887.) The balance was wagered on lotteries, horse and dog races, jai-alai, bingo and other games. Approximately 54 million Americans visited casinos. More American adults gamble, than abstain.
INTERNET GAMBLING
The first internet gambling site appeared in 1995. It was a "free" site, similar to a game playing site. The next year, 15 sites accepted money for gambling. Presently, there are about 1800 such sites. There is no way to have a precise measurement of internet gambling but estimates have been made by informed officials in the industry. In 2000 internet gambling from U.S. residents was estimated as $2 billion. By 2005 it had increased to $12 billion. On September 17,2006 "60 Minutes" on CBS had a segment on internet gambling. Internet gambling in the United States is illegal. Sixty-four other countries license internet gambling. The most prominent and successful companies are located in the United Kingdom. The CEO of "Bet on Sports" , the largest internet gambling company in the UK, was interviewed. He stated that 80% of their customers are U.S. residents.
On September 30, 2006 Congress passed HR4954. It is essentially a port security bill, but attached to it is legislation that prohibits U.S. banks and credit card companies from processing payments for illegal online gambling. In the press the opinion has been expressed that the law will temporarily slow down online gambling but not prevent it. Financial intermediary companies are likely to find loopholes that enable players to continue their sport.
U.S. GAMBLING TRENDS
The Personal Consumption Expenditures data in the National Income and Product Accounts contain three series on wagering: casinos; lotteries; and pari-mutuel net receipts. The data underlying these series are based on those activities that are regulated or pay taxes. The series do not include internet gambling or bingo or other gambling occurring in churches or private clubs. Also it is likely that the countless video lottery terminals located in virtually every convenience store are not fully counted. The level of the data, therefore, is understated, but the trends displayed by the data are probably valid.
In 2005, personal consumption expenditures on casinos were $76.3 billion; lotteries, $19.9 billion; and pari-mutuel, $6.2 billion for a TOTAL of $102.4 billion. To put this in perspective, selected categories from the same detail table include: admission to movies, legitimate theater, and sporting events ($38.3b); computers, software, & internet service providers ($72.3); cable TV ($63.0b); airline tickets ($33.8b); and religion ($57.4b). These comparisons show that the amount of consumer income used for wagering is substantial.
The chart shows that casino gambling has been the most rapidly growing venue for gambling. Over the 25 years such spending has increased at about 12% per year, on average. From 1991-1996 the increase was 21% per year, reflecting the explosion of Indian casinos following the IGRA passed in 1988.
Spending on lottery tickets shows a parabolic tendency with annual percentage changes moderating over time. Over the 25 years the gain averaged 11% per year, almost as much as casinos. Since 2000 there has been an increase at a 6% rate.
Pari-mutuel net receipts over the interval have increased at about 4% per year.
The trend of total wagering (three categories) over the past 25 years is 11% per year.
Over the same interval, disposable personal income had a trend of 5.8% per year.
Wagering as a percent of disposable personal income in 1981 was only 0.38%. From 1992-1997, reflecting the sharp increase in casinos wagering, the percentage increased by 0.3 points. In 2005, the value was 1.13%.
If the trends shown on the previous chart continue in the future, the percent will reach 5% in eight years.
ECONOMIC CONSEQUENCES OF GAMBLING
Numerous studies have indicated that there are positive economic consequences from gambling. State government lotteries have universally been started for the avowed purpose to support education. Even though in some states the funds have not been channeled into the advertised area, overall the profits from lotteries have presumably moderated school property taxes for homeowners. The tax moderation, if any, has been provided by the gamblers.
Casinos have also provided positive results. In fact, there is evidence in some cases that communities in decline have been "turned around" after a casino became operational in the area. Both commercial and Indian casinos have arrangements where a percentage of revenues is paid regularly to both the state and the community in which they are located. In addition, often there are specific fixed fees that must be paid regularly. First of all, opening a casino creates jobs. A bare bones casino opens with about 800 new jobs. After an onsite hotel and other amenities are added another 500 or so jobs are needed. The resulting personal taxable incomes have a positive effect on the area. In some areas the number of persons receiving public assistance has dropped as job opportunities were found. The funds from the share of revenues received by the state and community are generally used for: economic development; infra-structure improvement; assisting school systems; senior care; and other social programs to make the community a more desirable place to live. Of course, presumably taxes on residents are not as great as they would be otherwise.
There are some negatives. Businesses located nearby the casino (restaurants, movies and other entertainment) often see their business decline markedly. By far the majority of visitors to casinos regard them as a place to have a good time - it is entertainment. However, several of the sources I have used have stated that studies have shown that about 2.5% of the adult population can be classed as "pathological or problem" gamblers. (One study put the percentage for Maryland adults at 6%). Pathological is defined as, "governed by a compulsion". Pathological gamblers are not able to stop - they lose all their assets, go into debt, get divorced, commit crimes, and often end up in prison. There are secondary effects that flow from their activity. Robert Goodman in "The Luck Business" states that these gamblers cost the government and society when: (1) they lose their jobs and can't provide for themselves and their families (2) they don't work effectively so their employers suffer (3) don't pay their debts so the creditors suffer loss (4) commit fraud, embezzle, forge checks (5) cause additional costs for police and the court system and (6) society pays to keep them in jail. The costs of counseling for those that seek help have been estimated at around $1000 per year and up to $10,000 lifetime.
As of now, apparently the negative effects have not overwhelmed the positive. Our federal and state governments are still promoting gambling with laws that aim to regulate it in a positive way. The recent federal law to clamp down on internet gambling is an exception.
THE OUTLOOK
There are differing views on the outlook regarding the world and U.S.. David Schwartz, in his book, states that the world may be embarking on an interval in gambling that will rival the boom that occurred in Europe from 1650-1800. U.S. gaming officials have expressed the view that the brick and mortar gambling venues in existence today are adequate for expected slower demand growth. This view partly expresses the realization that on-line gambling will satisfy a lot of future gambling demand.
The question may be asked, "Why has there been such a rapid growth in gambling?" "Why have so many become habitual gamblers?" First of all, opportunities to wager have become extremely prevalent and the industry has shrewdly promoted "gaming" (not gambling) as entertainment. Secondly is the matter of attitude. Several of my sources mentioned views of psychologists/sociologists that globalization, international competition, and downsizing have been a background element. Downsizing, where good people lose their jobs, has caused insecurity in much of the work force. One stated, "When it became clear that long-term employment was no longer assured, employees turned to gambling. "Chance" in gambling seemed as likely as chance at work." Unfortunately for them, globalization and international competition are likely to continue in the future.
Quite apart from any question of morality, gambling raises questions for the economy and society. The Puritans posed the correct question when they asked if the effort of gambling produced anything beneficial to society. Translated, an economist is concerned about the "multiplier" of gambling once the negative elements have been deducted. How do the ripple effects from gambling increase jobs, incomes, and other benefits to the economy and society? The gambling multiplier is likely to be varied depending on the type of gambling and the geographic area in which it occurs. (Is there any multiplier for outside U.S.on-line gambling?) Research is required to determine the gambling effect since it has become so significant in this country. Government economic policy ideally should promote those activities where multipliers are highest.
END
SOURCES
Cozic,Charles P. & Winters, Paul A., "Gambling"
Goodman, Robert, "The Luck Business"
Lears, Jackson, "Something for Nothing"
Schwatz, David G., "Roll the Bones, The History of Gambling"
"The Gross Annual Wager", www.cca-i.com
www.gamblingphd.com
Bureau of Economic Analysis
Copyright © 2006 RowTek Economics. All rights reserved.
During the preparation of my earlier reports on (1) what it means to be a shareholder, and (2) asking if the stock market is a casino (available in archive) it became clear that most of the activity in the financial markets is not really investing, but rather gambling. There are legitimate business reasons to buy futures, options, puts, calls, hedge funds, etc. A manufacturer that relies on a specific raw material or a farm business that will be harvesting a crop in a few months have good reasons to hold futures. Businesses will have options or futures on foreign currencies to protect accounts receivable. Even an individual may engage in some of these purchases as insurance for their portfolio of investments. But there clearly are purchases and sales of financial instruments that are pure speculation, or gambling, not business related. So-called "day traders" are not likely involved in the markets for business reasons, nor are those who buy and sell quickly.
In 2000, Dean Baker, co-Director, Center for Economic and Policy Research, wrote a paper in which he advocated a small tax of 0.25% on every financial transaction. He made the case that this tax would raise $120 billion a year in tax revenue. The small tax would be insignificant to the long term investor, but would fairly tax the entities that are causing the majority of expense in operating the financial markets. He makes the point that other forms of gambling: casinos; lotteries; race tracks; etc. are taxed at rates between 3-40%. To be fair, financial market gambling should also be taxed. (Other well known economists, Lawrence Summers and Joseph Stiglitz have also made the case for such a tax.)
There are no figures on the amount of gambling in the financial markets. In order to get a total estimate, every person or business would have to be consulted and asked the reason for their actions. The figure is unknown - but it is substantial !
The awareness of gambling in financial markets piqued my interest to explore the subject of gambling in general.
HISTORY OF GAMBLING
Gambling has occurred almost since the beginning of mankind. Archaeologists uncovered crude fashioned dice in northern Iraq and were able to date them from 3000 BC. They were made from goat and sheep bones (the astragalus bone, just above the heel bone). There were markings on all sides and clearly were meant to be "rolled". Good historical records indicate that gambling grew rapidly in the Roman empire from 2nd century BC to the sixth century AD. Many countries are credited with developing various forms of gambling. Playing cards are thought to have evolved in China at around 900 AD. They were refined in France in the 1500's to resemble the current 52-deck playing cards in use today. Other historical records indicate that there was a boom in gambling in Europe from 1650-1800. (An excellent just-released book, "Roll the Bones, The History of Gambling" by David G. Schwartz provides extensive detail on the history.)
An Italian, Girolamo Cardano, was an avid gambler in the 1500's. He took gambling seriously and applied mathematics to it. In 1663, a book that he had written, "The Book on Games of Chance", was published posthumously. This is regarded as the first published work on the theory of probability. It was the development of probability theory that led to the birth of gambling as a business: casinos; lotteries; and bookmaking. Applying probability to various forms of gambling made it possible for a business to offer honest play to all participants and for the "house" to make a profit.
Over time governments have repeatedly attempted to suppress gambling but to no avail. Ways were always found to keep it growing. The attempts to control it usually were as a result of increased crime, prostitution, and other undesirable events that were associated with gambling. Interestingly, there is not much evidence that morality was a prime concern. Judaism and Christianity over the years have not expressed a firm position on gambling. This probably is because the Bible does not specifically condone or condemn gambling. In fact, there are numerous references in the Bible where decisions were based on "casting lots". It is believed, from archaeological finds, that "lots" were actually dice like , and casting lots really meant rolling dice. (Muslims prohibit gambling as evil and sinful.) Governments and religious leaders have at times pronounced gambling as undesirable based on Puritan work ethic principles. Puritans regarded it as a waste of time where nothing useful was being created.
GAMBLING IN THE UNITED STATES
Gambling in the United States has been prevalent since the birth of the country. Lotteries were used extensively in the colonies to provide funds for major infrastructure projects and social needs. In the late 1800's and into the early 1900's gambling had been on a decline. In 1910 the only gambling of consequence was horse racing in Kentucky and Maryland. New York actually banned horse racing from 1910-1913. During the depression years bingo became quite prevalent as gambling entertainment. As of the mid-'70s Nevada was the only state that sanctioned casino gambling. In November 1976 a referendum in Atlantic City was passed to allow casino gambling there. The referendum passed, after having been defeated two years previous, because of astute marketing that promised tremendous economic benefits that would restore the city to its former glory and also create thousands of jobs. In 1989 Iowa's state government approved gambling on riverboats. Many states adjacent to the Mississippi River quickly followed. The promise of economic benefits of gambling has spread so as of 2003 only Utah and Hawaii have no legal gambling. The other 48 have authorized various kinds of gambling. Thirty-nine states have well established lotteries. Alaska, Alabama, Arkansas and North Carolina have no state lotteries. The casino interests in Nevada and Mississippi have prevented lotteries in those states.
Indian tribes had been conducting bingo games for some years. The first semblance of an Indian casino opened in 1984 in northern Michigan. The Congress recognized that Indian gambling was occurring and in 1988 passed the Indian Gaming Regulatory Act. It provided rules and regulations for gaming by tribes. The tribes were required to negotiate compacts with the state government in which they were located. The compact stated what kinds of gambling could occur and what percentage of revenues would be paid to the state. The IGRA also required that all profits from gambling be used for the common good of the tribe. More than one-half of the 280 tribes now have gambling facilities in 28 states.
In 2003 Americans lost about $75 billion on games of chance. About one-half went to casinos (commercial and Indian). Eighty percent of casino gambling revenues are from slot machines. (The slot machine was invented in 1887.) The balance was wagered on lotteries, horse and dog races, jai-alai, bingo and other games. Approximately 54 million Americans visited casinos. More American adults gamble, than abstain.
INTERNET GAMBLING
The first internet gambling site appeared in 1995. It was a "free" site, similar to a game playing site. The next year, 15 sites accepted money for gambling. Presently, there are about 1800 such sites. There is no way to have a precise measurement of internet gambling but estimates have been made by informed officials in the industry. In 2000 internet gambling from U.S. residents was estimated as $2 billion. By 2005 it had increased to $12 billion. On September 17,2006 "60 Minutes" on CBS had a segment on internet gambling. Internet gambling in the United States is illegal. Sixty-four other countries license internet gambling. The most prominent and successful companies are located in the United Kingdom. The CEO of "Bet on Sports" , the largest internet gambling company in the UK, was interviewed. He stated that 80% of their customers are U.S. residents.
On September 30, 2006 Congress passed HR4954. It is essentially a port security bill, but attached to it is legislation that prohibits U.S. banks and credit card companies from processing payments for illegal online gambling. In the press the opinion has been expressed that the law will temporarily slow down online gambling but not prevent it. Financial intermediary companies are likely to find loopholes that enable players to continue their sport.
U.S. GAMBLING TRENDS
The Personal Consumption Expenditures data in the National Income and Product Accounts contain three series on wagering: casinos; lotteries; and pari-mutuel net receipts. The data underlying these series are based on those activities that are regulated or pay taxes. The series do not include internet gambling or bingo or other gambling occurring in churches or private clubs. Also it is likely that the countless video lottery terminals located in virtually every convenience store are not fully counted. The level of the data, therefore, is understated, but the trends displayed by the data are probably valid.
In 2005, personal consumption expenditures on casinos were $76.3 billion; lotteries, $19.9 billion; and pari-mutuel, $6.2 billion for a TOTAL of $102.4 billion. To put this in perspective, selected categories from the same detail table include: admission to movies, legitimate theater, and sporting events ($38.3b); computers, software, & internet service providers ($72.3); cable TV ($63.0b); airline tickets ($33.8b); and religion ($57.4b). These comparisons show that the amount of consumer income used for wagering is substantial.
The chart shows that casino gambling has been the most rapidly growing venue for gambling. Over the 25 years such spending has increased at about 12% per year, on average. From 1991-1996 the increase was 21% per year, reflecting the explosion of Indian casinos following the IGRA passed in 1988.
Spending on lottery tickets shows a parabolic tendency with annual percentage changes moderating over time. Over the 25 years the gain averaged 11% per year, almost as much as casinos. Since 2000 there has been an increase at a 6% rate.
Pari-mutuel net receipts over the interval have increased at about 4% per year.
The trend of total wagering (three categories) over the past 25 years is 11% per year.
Over the same interval, disposable personal income had a trend of 5.8% per year.
Wagering as a percent of disposable personal income in 1981 was only 0.38%. From 1992-1997, reflecting the sharp increase in casinos wagering, the percentage increased by 0.3 points. In 2005, the value was 1.13%.
If the trends shown on the previous chart continue in the future, the percent will reach 5% in eight years.
ECONOMIC CONSEQUENCES OF GAMBLING
Numerous studies have indicated that there are positive economic consequences from gambling. State government lotteries have universally been started for the avowed purpose to support education. Even though in some states the funds have not been channeled into the advertised area, overall the profits from lotteries have presumably moderated school property taxes for homeowners. The tax moderation, if any, has been provided by the gamblers.
Casinos have also provided positive results. In fact, there is evidence in some cases that communities in decline have been "turned around" after a casino became operational in the area. Both commercial and Indian casinos have arrangements where a percentage of revenues is paid regularly to both the state and the community in which they are located. In addition, often there are specific fixed fees that must be paid regularly. First of all, opening a casino creates jobs. A bare bones casino opens with about 800 new jobs. After an onsite hotel and other amenities are added another 500 or so jobs are needed. The resulting personal taxable incomes have a positive effect on the area. In some areas the number of persons receiving public assistance has dropped as job opportunities were found. The funds from the share of revenues received by the state and community are generally used for: economic development; infra-structure improvement; assisting school systems; senior care; and other social programs to make the community a more desirable place to live. Of course, presumably taxes on residents are not as great as they would be otherwise.
There are some negatives. Businesses located nearby the casino (restaurants, movies and other entertainment) often see their business decline markedly. By far the majority of visitors to casinos regard them as a place to have a good time - it is entertainment. However, several of the sources I have used have stated that studies have shown that about 2.5% of the adult population can be classed as "pathological or problem" gamblers. (One study put the percentage for Maryland adults at 6%). Pathological is defined as, "governed by a compulsion". Pathological gamblers are not able to stop - they lose all their assets, go into debt, get divorced, commit crimes, and often end up in prison. There are secondary effects that flow from their activity. Robert Goodman in "The Luck Business" states that these gamblers cost the government and society when: (1) they lose their jobs and can't provide for themselves and their families (2) they don't work effectively so their employers suffer (3) don't pay their debts so the creditors suffer loss (4) commit fraud, embezzle, forge checks (5) cause additional costs for police and the court system and (6) society pays to keep them in jail. The costs of counseling for those that seek help have been estimated at around $1000 per year and up to $10,000 lifetime.
As of now, apparently the negative effects have not overwhelmed the positive. Our federal and state governments are still promoting gambling with laws that aim to regulate it in a positive way. The recent federal law to clamp down on internet gambling is an exception.
THE OUTLOOK
There are differing views on the outlook regarding the world and U.S.. David Schwartz, in his book, states that the world may be embarking on an interval in gambling that will rival the boom that occurred in Europe from 1650-1800. U.S. gaming officials have expressed the view that the brick and mortar gambling venues in existence today are adequate for expected slower demand growth. This view partly expresses the realization that on-line gambling will satisfy a lot of future gambling demand.
The question may be asked, "Why has there been such a rapid growth in gambling?" "Why have so many become habitual gamblers?" First of all, opportunities to wager have become extremely prevalent and the industry has shrewdly promoted "gaming" (not gambling) as entertainment. Secondly is the matter of attitude. Several of my sources mentioned views of psychologists/sociologists that globalization, international competition, and downsizing have been a background element. Downsizing, where good people lose their jobs, has caused insecurity in much of the work force. One stated, "When it became clear that long-term employment was no longer assured, employees turned to gambling. "Chance" in gambling seemed as likely as chance at work." Unfortunately for them, globalization and international competition are likely to continue in the future.
Quite apart from any question of morality, gambling raises questions for the economy and society. The Puritans posed the correct question when they asked if the effort of gambling produced anything beneficial to society. Translated, an economist is concerned about the "multiplier" of gambling once the negative elements have been deducted. How do the ripple effects from gambling increase jobs, incomes, and other benefits to the economy and society? The gambling multiplier is likely to be varied depending on the type of gambling and the geographic area in which it occurs. (Is there any multiplier for outside U.S.on-line gambling?) Research is required to determine the gambling effect since it has become so significant in this country. Government economic policy ideally should promote those activities where multipliers are highest.
END
SOURCES
Cozic,Charles P. & Winters, Paul A., "Gambling"
Goodman, Robert, "The Luck Business"
Lears, Jackson, "Something for Nothing"
Schwatz, David G., "Roll the Bones, The History of Gambling"
"The Gross Annual Wager", www.cca-i.com
www.gamblingphd.com
Bureau of Economic Analysis
Copyright © 2006 RowTek Economics. All rights reserved.
THE STOCK MARKET - - - - A CASINO ? ? ?
Robert O. Welk RowTek Economics
The
well-known economist, Paul Samuelson and also Eugene Fama, a
University
of Chicago economist, both held the view that attempting to pick the
right stock was up to the Demon of Chance. Samuelson is thought to be
among the first to discover, and be influenced by, the work of Louis
Bachelier, a French economist, whose work in 1900 indicated that
participating in the stock market is a zero-sum game. Samuelson
published a paper in the 1960's that formed the basis for the Efficient
Market Hypothesis and of the market being a random walk. His work, and
that of many others, suggest that “going to the market equals going to
the casino”.
During the past half-century, numerous well-known economists developed many theories and models, attempting to pin down the stock market. As a result, stocks are bought and sold today with the aid of computers using sophisticated formulas. Gut instinct plays a minimal role. But in spite of all the years of research by high-powered minds a panacea, or “silver bullet” has not been discovered. Even with all the advancements, it has not been possible to eliminate chance, that is, “risk” from participating in the stock market. Some of the subjects and their developers follow: Dividend Discount Model (John Burr Williams); Capital Asset Pricing Model(William Sharpe, Jack Treynor); Separation Theorem (James Tobin); portfolio diversification (Harry Markowitz); index funds(William Fouse); portfolio insurance (Hayne Leland); arbitrage (Merton Miller, Franco Modigliani); pricing options (Fischer Black, Robert Merton, Myron Scholes).
In all of this sophisticated research, I did not find anyone who asked what the individual investor thought about when he purchased a share of stock. On every business day nearly 4 billion shares of stock trade hands ( 2 billion, NYSE and 2 billion NASDAQ). About 70 percent of shares are held by pension funds, other institutions, and mutual funds. Individual direct share owners now hold only 30 percent of outstanding shares. On a given day a seller of shares may have many reasons for wanting to sell: he may need the funds to pay his child’s college tuition or some other need; he may believe that the dividends being paid are too low; he may believe that the company’s future prospects for success have dimmed; or there may be tax considerations. At the same time there will be someone who will want to buy those shares. The question is, “Why”?
Generally speaking, when a person parts with his money he expects to receive a product, a service, or some other return or benefit. When companies began issuing shares in the 1500's, shareholders expected a percentage of any profits in the form of dividends. Originally, that percentage ran as much as 50%. Today, the buyer may want to buy a company’s shares because it has a consistent record over time of paying dividends at a favorable rate of return. From a practical standpoint this is not likely at present because the dividend yield for the S&P 500 companies is only 1.88%, not as good as CD’s or money market funds. Of the S&P 500 companies 115 or 23% pay no dividends at all. Why would an investor want to buy shares in a company that pays such meager dividends or none at all? He may believe that he actually “owns” a share of that company’s assets, and technically that is correct. In reality, the only way that he would receive a share of company assets is if the company, being completely solvent with no debt, decided to go out of business. More likely, if the company files for bankruptcy creditors have first claim on assets and shareholders get nothing. Often in such cases, class action suits by shareholders are filed against the company. They are usually settled for pennies per share.
If one goes to a casino and uses the machines, tables, or wheels, his success will not be as great as his skill level. The thoughtful gambler knows that the house is rigged against him because casinos are profit making enterprises. Similarly, when participating in the stock market the shareholder is at a disadvantage. During the bull market of the 1920's preceding the ‘29 crash, Ferdinand Pecora, assistant district attorney in New York was the Eliot Spitzer of his day. He exposed fraud and unethical practices among companies and their relationships with banks. Following the crash Pecora was called on to lead Congressional hearings into the inappropriate conduct of companies and banks that preceded the crash. In 1933 Congress passed the Securities Act which required issuance of new securities to be registered with the Federal Trade Commission. As more and more improprieties came to light even more regulation seemed necessary. In 1934 the Securities Exchange Act was passed and a commission was formed to oversea the conduct of companies particularly in respect to the stock market. Pecora was one of the original five commissioners. The charge for the SEC was to see that from that time on the stock market would be clean and trustworthy.
The significant number of companies that used fraudulent accounting and other devious practices during the recent stock market bubble indicated that the SEC failed miserably in upholding its charter. Following the recent crash, once again Congress held hearings and quickly passed Sarbanes-Oxley so that in the future the stock market would be clean and trustworthy. Quick action was required because the investors trust had to be regained! There is already evidence that SOX is not likely to be any more successful than SEC. The recent Refco scandal exposed a loophole in Sarbanes-Oxley. In my view, there is little hope that any amount of regulation can be successful. The reason a free market system is efficient and most beneficial is because the participants are involved for their own self interest and success. Human ingenuity will find ways to circumvent rules and regulations. The Efficient Market Theory states that the share price for a company at any given time represents the “true” value of that company. Don’t believe it!
So what does an investor get for turning over his money for a share of common stock? First of all, he receives a certificate, or more likely, a computer entry that he owns it. It has no intrinsic value. It has value only if someone in the future thinks it has value. That buyer will only think it has value if there has been favorable information made available about that company. In the preceding paragraph I question whether it is possible to know what the information really means. Are price-earnings ratios, and all the other financial measures, relevant?
So what is an investor to do? He has little alternative but to invest in the stock market. It is extremely large and liquid. It is one of few investments where it is possible on almost a moments notice to convert an investment into cash. If the investor is able to find a company that has regularly paid a significant dividend and he buys those shares he knows the return he is receiving. If he invests in any other stock the outcome is so uncertain that he is counting on the Demon of Chance to reward him. He should realize that swings in stock prices are random. (See the study below). (If shares are purchased through mutual funds there is another level of risk because the fund will invest in a way most beneficial to itself.) In whatever way the investor participates, he should acknowledge the risk - - - much like going to the casino.
Bibliography
Bernstein, Peter L. “Capital Ideas”
Bernstein, Peter “Risk at the Roots” www.risk-analysis-center.com
Geisst, Charles R. “Wall Street”
Lowenstein, Roger “Origins of the Crash”
Malkiel, Burton G. “A Random Walk down Wall Street”
Mamis, Justin “The Nature of Risk”
Micklethwaite, J. & Wooldridge, A. “The Company”
Shiller, Robert J. “Risk in the 21st Century”
Smith, B. Mark “A History of the Global Stock Market”
Taleb, Nassim N. “Fooled by Randomness”
During the past half-century, numerous well-known economists developed many theories and models, attempting to pin down the stock market. As a result, stocks are bought and sold today with the aid of computers using sophisticated formulas. Gut instinct plays a minimal role. But in spite of all the years of research by high-powered minds a panacea, or “silver bullet” has not been discovered. Even with all the advancements, it has not been possible to eliminate chance, that is, “risk” from participating in the stock market. Some of the subjects and their developers follow: Dividend Discount Model (John Burr Williams); Capital Asset Pricing Model(William Sharpe, Jack Treynor); Separation Theorem (James Tobin); portfolio diversification (Harry Markowitz); index funds(William Fouse); portfolio insurance (Hayne Leland); arbitrage (Merton Miller, Franco Modigliani); pricing options (Fischer Black, Robert Merton, Myron Scholes).
In all of this sophisticated research, I did not find anyone who asked what the individual investor thought about when he purchased a share of stock. On every business day nearly 4 billion shares of stock trade hands ( 2 billion, NYSE and 2 billion NASDAQ). About 70 percent of shares are held by pension funds, other institutions, and mutual funds. Individual direct share owners now hold only 30 percent of outstanding shares. On a given day a seller of shares may have many reasons for wanting to sell: he may need the funds to pay his child’s college tuition or some other need; he may believe that the dividends being paid are too low; he may believe that the company’s future prospects for success have dimmed; or there may be tax considerations. At the same time there will be someone who will want to buy those shares. The question is, “Why”?
Generally speaking, when a person parts with his money he expects to receive a product, a service, or some other return or benefit. When companies began issuing shares in the 1500's, shareholders expected a percentage of any profits in the form of dividends. Originally, that percentage ran as much as 50%. Today, the buyer may want to buy a company’s shares because it has a consistent record over time of paying dividends at a favorable rate of return. From a practical standpoint this is not likely at present because the dividend yield for the S&P 500 companies is only 1.88%, not as good as CD’s or money market funds. Of the S&P 500 companies 115 or 23% pay no dividends at all. Why would an investor want to buy shares in a company that pays such meager dividends or none at all? He may believe that he actually “owns” a share of that company’s assets, and technically that is correct. In reality, the only way that he would receive a share of company assets is if the company, being completely solvent with no debt, decided to go out of business. More likely, if the company files for bankruptcy creditors have first claim on assets and shareholders get nothing. Often in such cases, class action suits by shareholders are filed against the company. They are usually settled for pennies per share.
If one goes to a casino and uses the machines, tables, or wheels, his success will not be as great as his skill level. The thoughtful gambler knows that the house is rigged against him because casinos are profit making enterprises. Similarly, when participating in the stock market the shareholder is at a disadvantage. During the bull market of the 1920's preceding the ‘29 crash, Ferdinand Pecora, assistant district attorney in New York was the Eliot Spitzer of his day. He exposed fraud and unethical practices among companies and their relationships with banks. Following the crash Pecora was called on to lead Congressional hearings into the inappropriate conduct of companies and banks that preceded the crash. In 1933 Congress passed the Securities Act which required issuance of new securities to be registered with the Federal Trade Commission. As more and more improprieties came to light even more regulation seemed necessary. In 1934 the Securities Exchange Act was passed and a commission was formed to oversea the conduct of companies particularly in respect to the stock market. Pecora was one of the original five commissioners. The charge for the SEC was to see that from that time on the stock market would be clean and trustworthy.
The significant number of companies that used fraudulent accounting and other devious practices during the recent stock market bubble indicated that the SEC failed miserably in upholding its charter. Following the recent crash, once again Congress held hearings and quickly passed Sarbanes-Oxley so that in the future the stock market would be clean and trustworthy. Quick action was required because the investors trust had to be regained! There is already evidence that SOX is not likely to be any more successful than SEC. The recent Refco scandal exposed a loophole in Sarbanes-Oxley. In my view, there is little hope that any amount of regulation can be successful. The reason a free market system is efficient and most beneficial is because the participants are involved for their own self interest and success. Human ingenuity will find ways to circumvent rules and regulations. The Efficient Market Theory states that the share price for a company at any given time represents the “true” value of that company. Don’t believe it!
So what does an investor get for turning over his money for a share of common stock? First of all, he receives a certificate, or more likely, a computer entry that he owns it. It has no intrinsic value. It has value only if someone in the future thinks it has value. That buyer will only think it has value if there has been favorable information made available about that company. In the preceding paragraph I question whether it is possible to know what the information really means. Are price-earnings ratios, and all the other financial measures, relevant?
So what is an investor to do? He has little alternative but to invest in the stock market. It is extremely large and liquid. It is one of few investments where it is possible on almost a moments notice to convert an investment into cash. If the investor is able to find a company that has regularly paid a significant dividend and he buys those shares he knows the return he is receiving. If he invests in any other stock the outcome is so uncertain that he is counting on the Demon of Chance to reward him. He should realize that swings in stock prices are random. (See the study below). (If shares are purchased through mutual funds there is another level of risk because the fund will invest in a way most beneficial to itself.) In whatever way the investor participates, he should acknowledge the risk - - - much like going to the casino.
Bibliography
Bernstein, Peter L. “Capital Ideas”
Bernstein, Peter “Risk at the Roots” www.risk-analysis-center.com
Geisst, Charles R. “Wall Street”
Lowenstein, Roger “Origins of the Crash”
Malkiel, Burton G. “A Random Walk down Wall Street”
Mamis, Justin “The Nature of Risk”
Micklethwaite, J. & Wooldridge, A. “The Company”
Shiller, Robert J. “Risk in the 21st Century”
Smith, B. Mark “A History of the Global Stock Market”
Taleb, Nassim N. “Fooled by Randomness”
END
SHAREHOLDER ? ? ? SHAREOWNER ? ? ?
Robert O. Welk RowTek Economics
For many years I have
subconsciously wondered what it really means to be one of these. In
fact,
just recently I found a voice recorded tape, made in 1995, where I
listed ideas that should be
explored. The quote, “look into what it means to be a shareholder now
that so many shares are
purchased through mutual funds.”
Over the years, the role of shareholder has changed greatly. Historically, there is evidence that equities were being used in the Roman Empire in the second century BC. The first organized bourse, or stock market, came into being in Antwerp in the mid 1500's. By the early 1600's Amsterdam replaced Antwerp as the financial capital of Western Europe. In 1609 the Dutch East India Company was formed as a joint-stock company. Joint-stock companies were those where the investors were not partners, or managers, of the company. Dutch East India is regarded as the first example of the modern corporation. In 1819 the UK went on the gold standard. At the time this was widely accepted as such a sound financial decision that world finance shifted toward the UK. London dominated as the financial center during the nineteenth century. Today the financial markets in New York and London are regarded as the most open and sophisticated in the world.
The stock market has been
viewed with suspicion and condemnation since the beginning. The
recent scandals are nothing new. In 1720 the collapse of the
Mississippi and South Sea
companies were examples of excess speculation, greed, insider trading,
crony capitalism, and all
else. Other examples of speculative bubbles are documented in financial
history. B. Mark
Smith’s book indicates that the stock market was denounced as evil as
far back as St. Augustine
and St. Thomas Aquinas. In the 1930's a U.S. Senator declared the
market as, “a great gambling
hell” that should be “closed down and padlocked”. British Labour Party
officials called
stockbrokers “parasites” and the market a “plaything for wealthy
speculators”. In 2002, the
Japanese finance minister called their market a “gambling den”. After
each bubble, scandal, or
collapse in stock prices, governments passed laws to restrain markets
and to prevent such things
from ever happening again!
In the early development of stock markets, shareholders were really that. They were almost a partner in the company. It was expected that at least one-half of any profits would be returned to them as dividends. But they also had liability concerns. They were liable for all actions and debts of the company. The liability went so far as to have their personal assets confiscated if needed for settlement. It was only in the latter part of the eighteenth century that the British government began to specify limited liability for shareholders in corporate charters. As mentioned, the primary reason for investors to purchase equities was for dividends. Appreciation in the value of the stock was not much of a concern except for speculators.
To address the question of
the meaning of shareholder or shareowner today the words need to be
defined. Webster’s dictionary has the following: Share - any one of the
equal parts into which
the capital stock of a corporation is divided.; Owner - one who has,
possesses, or holds as
personal property.; Holder - one who owns, possesses, has the duties
and privileges of. The key word in both Owner and Holder is the word
“possess”. It is defined as: “to gain strong
influence or control over”. Clearly, the individual purchasers of
shares have no influence or
control over anything related to the company whose shares they hold.
Except for Bill Gates,
Warren Buffett, Kirk Kerkorian, or some others, no one could have
enough shares to be listened
to by company management. The average company in the S&P 500 has
about 400 million shares
outstanding. General Electric has 10.6 billion shares. There is no
effective shareholder
association, or union, covering each company to exert influence on
management. Shareholders
receive proxy statements that are essentially irrelevant. Making
complaints at a shareholder
meeting are noise that goes in one ear and out the other. The
individual shareholder is no more
than a bothersome gnat. Managements give lip service to shareholders
but their concern is not
sincere. They do care about having their share prices rise, not for the
shareholders, but because
much of their compensation is tied to their stock price. That
shareholders are irrelevant, I need
only mention Enron, Worldcom, Tyco, Adelphia, Imclone, Putnam
Investments, etc. etc. If
shares are owned through mutual funds, and that includes 95 million
people, the investor is
removed another step further. Two centuries ago Adam Smith warned that
managers of other
people’s money cannot be expected to watch over it with the same
anxious diligence as their
own. He also warned of the dangers of separating the management of
corporations from
ownership.
So what are shareholders or shareowners ? These terms connote average good upstanding citizens who have a long-term horizon and are trying to prepare for their future. They are not speculators. The definition of such are: one who takes part in any risky venture on the chance of making huge profits. Speculators are operating in the stock market: daytraders; purchasers of puts, calls, options, etc. Rather shareholders are investors. Investors: those who put money into businesses, real estate, stocks, bonds, etc. for the purpose of obtaining an income or profit. The terms shareholder and shareowner should be eliminated from the business press because they are misnomers and are misleading. Instead they should be called what they are: investors!
Investors do confront risk.
They have no control over the outcome of their investment except to
buy it or sell it. The shares they hold do not have much value in
themselves. They are much like
an item with the logo of a sports team. It is a favorite, owners have
bet on it, and hope to win. In
days past, the success of a company could be measured by the dividends
they paid. Today,
dividends at 1.84% for the S&P 500 companies, are not superior to
risk free CD’s. Rather,
appreciation is what is important. With the flood of information about
companies in the press,
TV, internet, etc.,an additional element of risk is present. Share
prices, quite apart from the real
success of the company, may reflect media hype which is deceptive,
misleading, or out of
context.
But even with this background, investors have no better alternative but to invest in equities. Historically, they have had the best real returns. Equally important, as in the past, the market is huge and therefore is very liquid. In contrast to real estate, art work, or other fixed wealth, funds can be put in and taken out with ease.
END
Copyright © 2005 RowTek Economics. All Rights Reserved
Copyright © 2005 RowTek Economics. All Rights Reserved
RANDOMNESS IN WEEKLY STOCK PRICE CHANGES
Robert O. Welk RowTek Economics
In the
report on weekly stock prices, the assumption that weekly price changes
are random required that a moving average be developed in order
to determine the true trend of prices in the market. This report tests that assumption in technical terms.
The interval selected for the test is the five years 1999-2003. This interval is relevant in that the trends within the time span cover a cycle. Two years were strong (1999 and 2000), a down move occurred in '01 and '02, and a very sharp upmove appeared in '03. The following chart shows the 260 weekly percent changes in the S&P 500 during the five year interval.
CHART 1: A statistical test and also empirical observation of the
chart shows no serial correlation. There is no observable trend in the
weekly percent changes.
CHART 2: The distribution is leptokurtic, but
has the elements of a
normal curve. The distribution is fairly symmetrical. The mean of the
distribution is close to zero (minus four one hundredths percent) and
the plus and minus weeks are in near balance (134 versus 126).
CHART 3: This chart represents an
interesting exercise taking account
of the randomness in weekly changes. A random number generator,
incorporating a probability function based on the above distribution,
was developed. Ten iterations of the generator were run. On the chart,
the high and low results are shown, along with one of the projections in
the center.
Since the random number generator projections were run last June, weekly
stock prices have tended to move most closely to the central
projection. Since the end of October,however, stock prices have moved
up strongly and ended the year at the high random projection. Analysts
attribute this recent move to the results of the election and falling
oil prices.
In summary, short term forecasts of movements in stock prices may be
meaningless. World events and human decisions are infinite and are
unknown. How these events and decisions interact cause a result that is
random. The randomness is reflected in stock prices.
END
Copyright © 2005 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE
to determine the true trend of prices in the market. This report tests that assumption in technical terms.
The interval selected for the test is the five years 1999-2003. This interval is relevant in that the trends within the time span cover a cycle. Two years were strong (1999 and 2000), a down move occurred in '01 and '02, and a very sharp upmove appeared in '03. The following chart shows the 260 weekly percent changes in the S&P 500 during the five year interval.
CHART 1: A statistical test and also empirical observation of the
chart shows no serial correlation. There is no observable trend in the
weekly percent changes.
CHART 2: The distribution is leptokurtic, but
has the elements of anormal curve. The distribution is fairly symmetrical. The mean of the
distribution is close to zero (minus four one hundredths percent) and
the plus and minus weeks are in near balance (134 versus 126).
CHART 3: This chart represents an
interesting exercise taking accountof the randomness in weekly changes. A random number generator,
incorporating a probability function based on the above distribution,
was developed. Ten iterations of the generator were run. On the chart,
the high and low results are shown, along with one of the projections in
the center.
Since the random number generator projections were run last June, weekly
stock prices have tended to move most closely to the central
projection. Since the end of October,however, stock prices have moved
up strongly and ended the year at the high random projection. Analysts
attribute this recent move to the results of the election and falling
oil prices.
In summary, short term forecasts of movements in stock prices may be
meaningless. World events and human decisions are infinite and are
unknown. How these events and decisions interact cause a result that is
random. The randomness is reflected in stock prices.
END
Copyright © 2005 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE