Gambling has had many different meanings depending on the cultural and historical context in which it is used. Currently, in western society, it has an economic definition, referring to “wagering money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money or material goods”. Typically the outcome of the wager is evident within a short period of time.
This definition of gambling usually excludes:
- Emotional or physical risk-taking where what is being risked is not money or material goods (e.g., skydiving, running for office, asking someone for a date, etc.)
- Buying insurance, as the primary intent of the purchase is to protect against loss, rather than to collect or win
- All forms of ‘investment’ (stock market, real estate) with positive expected returns, economic utility, and some underlying value independent of the risk being undertaken
- Starting a new business, as time and effort are also being wagered and the outcome is not determined in a short period of time
- Situations where the possibility of winning additional money or material goods is a secondary or incidental reason for the wager/purchase (e.g., buying a raffle ticket to support a worthy cause)
- Prediction markets or knowledge exchanges where the outcome is to encourage the development of market-based mechanisms for resolving questions of science, technology, management, strategy, planning, policy, etc.
There are three variables common to all forms of gambling:
- How much is being wagered, the initial stake (in money or material goods).
- The predictability of the event.
- In mechanical or electronic gambling such as lotteries, slot machines and bingo, the results are random and unpredictable; no amount of skill or knowledge (assuming machinery is functioning as intended) can give an advantage in predicatability to anyone.
- However, for sports events such as horse racing and soccer matches there is some predictability to the outcome; thus a person with greater knowledge and/or skill will have an advantage over others.
- The odds agreed between the two (or more) parties to the wager; where there is a house or a bookmaker, the odds are (quite legally) arranged in favour of the house.
The expected value, positive or negative, is a mathematical calculation using these three variables. The amount wagered determines the scale of an individual wager (bet); the odds and the amount wagered determine the payout if successful; the predicability determines the frequency of success. Finally the frequency of success times the payout minus the amount wagered equals the “expected value” The skill of a gambler lies in understanding and manoeuvring the three variables so that the “actual value” is positive over a series of wagers.