Posts Tagged ‘gambling’
“There are two times in a man’s life when he shouldn’t speculate: when he can afford to and when he can’t.”*…
Robinhood, the trading platform supposedly meant “to democratize finance for all”: not all change is progress; not all “disruption” is for the good…
… What is Robinhood?
The company operates a mobile app that enables consumers to trade stocks, options, and crypto. These orders are the company’s inventory, which it sells to “market makers” — large financial institutions that pare (execute) the trades in the market. As with Google or Facebook, Robinhood’s users are not its customers, but its supply.
This means Robinhood is incentivized to keep its users trading … a lot. The goal: make stock trading as addictive as social media scrolling. RH has enjoyed success here. The proportion of users who check it daily rivals those of Twitter, Snapchat, and Facebook.
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The transaction at the heart of the company’s model is “Payment for Order Flow” or PFOF. Because RH generates its revenue by selling orders to market makers, it doesn’t charge commissions to its consumer users. But this also creates a conflict of interest for the company, which is motivated to sell orders to the market maker that offers the highest payment for the trade rather than the best price. It’s like affiliate marketing, but for your financial future.
PFOF goes back to the 1980s, when it was pioneered by, wait for it … Bernie Madoff. Madoff relied on the practice to make his firm one of the leading market makers of its day, and when regulators raised questions about whether it presented a conflict of interest, he used his position as the chairperson of Nasdaq to prevent restrictions. (PFOF is illegal in the U.K.) There was no conflict of interest, Madoff assured his colleagues, because “there are very strict rules that I would assume most firms comply with.”
Robinhood is the latest example of an increasing trend: tech companies for whom illegality is a feature, not a bug. Uber is an $86 billion gypsy cab company. Facebook and Google have received so many fines, it’s likely the companies internally classify them as a cost of doing business. This is tantamount to replacing civics courses with prison training, because … well … that’s how we roll.
For its part, RH has racked up: a $70 million settlement with FINRA, a $65 million SEC fine (for failing to properly disclose PFOF), and a separate $1.25 million FINRA fine. And on Wednesday, on the eve of pricing its IPO, the company disclosed that its senior executives are under investigation by FINRA for failing to acquire broker-dealer licenses. In addition, another inquiry is under way into the possibility that RH employees made illegal insider trades during the GameStop frenzy early this year.
Once, that type of disclosure would have dismembered an IPO. Instead, 48 hours after it made the disclosure, Robinhood was publicly trading at $32 billion. Telling point: The company paid its chief legal officer, Daniel Gallagher, more than $30 million in 2020, even though it hired him halfway through the year. From 2011 to 2015, Gallagher was an SEC Commissioner. Our business environment has morphed from capitalism, which depends on the rules of fair play, into cronyism.
Flouting the law is now a signal to investors that a firm is “disruptive.” Established companies, which believe they have too much to lose, have spent years investing in a culture of compliance to protect themselves. Disrupters, with access to cheap capital and few legacy assets, have no such constraints. In Robinhood’s case, no less an establishment bulwark than Goldman Sachs has blessed its approach to business by taking the lead on the company’s IPO. Forget orange — criminality without consequence is the new black.
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In practice, Robinhood’s activities look more like the dispersion of financial risk than the “democratization of finance” — kind of like if a for-profit prison claimed to be “democratizing housing.” As both an app and as an investment, RH makes more sense in the context of gambling than investing. Its business model depends on active traders, but research shows the more active traders are, the more money they lose. Likewise, the casino isn’t making much off the blackjack player who sits at the $5 table cadging free drinks, but it hopes the lure of easy money (and the lubrication of those free drinks) will loosen his pockets eventually.
Greater gambling access is becoming a trend. The illegal sports betting market, estimated at $150 billion a year, is rapidly moving to legal online forums. You can now place a sports bet from your couch in 20 states and counting, and mobile gambling apps are reaping the rewards. Since its SPAC listing in April 2020, DraftKings’ stock is up 160%. I don’t have a problem with this, as these firms state what they’re made for: gambling.
Another market that’s benefited from our insatiable appetite for risk? Crypto. Robinhood caught that trend early and introduced crypto trading to its platform in February 2018. Since then, the global crypto market has grown from $450 billion to $1.9 trillion. In the first three months of 2021, 6% of RH’s revenue came from Dogecoin trades. If that sounds like an unstable business model, trust your instincts.
Here’s what we’re saddled with: A trend of companies that prey on our financial naiveté, with no regard for law or morality and infinite amounts of capital. What can we do?
First, it’s long past time for the rule of law to reassert itself. Five years ago, admissions to elite universities were awash in bribery and fraud. Then the feds put some wealthy lawyers, investors, and television stars in jail. Did it work? I’d venture that if any parent receives an offer of a “side door” for their kid to get into an elite university today, the parent hangs up, crisply.
Second, we need to arm ourselves, and particularly our young people, with financial literacy. Everyone should be fluent in the basics of markets and how to build financial security. My NYU colleague Aswath Damodaran believes the best regulation is life lessons. Perhaps basic lessons in finance (e.g., not to trade on an app that harvests its orders for revenue) would lessen the pain of these lessons. If we can offer computer science and Mandarin in schools, we should offer courses in financial literacy. The English-as-a-second language course in any capitalist society ought to be in money.
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We’ve implemented policies in the U.S. that have resulted in a halving of the wealth of Americans under the age of 40 (as a percentage of household wealth) over the past three decades. With so much less to lose, today’s young Americans are justifiably looking for new asset classes and embracing volatility. Put another way, there is cause for a rebellion. The food industrial complex wants you to be fat, social media wants you to be divided, and RH wants you to believe you can get rich quick by day trading. Rebel.
When the democratization of finance isn’t: “$HOOD.” Scott Galloway (@profgalloway) on the dangerously disingenuous Robinhood.
* Mark Twain
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As we reconcile ourselves to the fact that if it seems to be too good to be true, it is, we might recall that it was on this date in 2018 that Apple became the first U.S.-based company with a $1 trillion market cap. Shares of Apple rose 2.9% on the day, closing at $207.39, giving the company a $1.002 trillion valuation. Shares of Apple’s stock were up about 40,000% since Apple computer’s IPO on December 12th, 1980.
Amazon broke the $1 trillion milestone a month later on September 4th, 2018. Microsoft reached the milestone nearly a year later, on April 25th, 2019.
“The urge to gamble is so universal and its practice so pleasurable that I assume it must be evil”*…
Gambling has existed since antiquity, but in the past 30 years it’s grown at a spectacular rate, turbocharged by the internet and globalisation. Problem gambling has grown accordingly, and become particularly prevalent in the teenage population. Even more troublingly, a study in 2013 reported that slightly over 90 per cent of problem gamblers don’t seek professional help. Gambling addiction is part of a suite of damaging and unhealthy behaviours that people do despite warnings, such as smoking, drinking or compulsive video gaming. It draws on a multitude of cognitive, social and psychobiological factors.
Psychological and medical studies have found that some people are more likely to develop a gambling disorder than others, depending on their social condition, age, education and experiences such as trauma, domestic violence and drug abuse. Problem gambling also involves complex brain chemistry, as gambling stimulates the release of multiple neurotransmitters including serotonin and dopamine, which in turn create feelings of pleasure and the attendant urge to maintain them. Serotonin is known as the happiness hormone, and typically follows a sense of release from stress or fear. Dopamine is associated with intense pleasure, released when we’re engaged in activities that deserve a reward, and precisely when that reward occurs – seeing the ball landing on the number we’ve bet on, or hearing the sound of the slot machine showing a winning payline.
For the most part, gambling addiction is viewed as a medical and psychological problem, though this hasn’t resulted in widely effective prevention and treatment programmes. That might be because the research has often focused on the origins and prevalence of addiction, and less on the cognitive premises and mechanisms that actually take place in the brain. It’s a controversial area, but this arguable lack of clinical effectiveness doesn’t appear to be specific to gambling; it applies to other addictions as well, and might even extend to some superstitions and irrational beliefs.
Can a proper presentation of the mathematical facts help gambling addiction? While most casino moguls simply trust the mathematics – the probability theory and applied statistics behind the games – gamblers exhibit a strange array of positions relative to the role of maths. While no study has offered an exhaustive taxonomy, what we know for sure is that some simply don’t care about it; others care about it, trust it, and try to use it in their favour by developing ‘winning strategies’; while others care about it and interpret it in making their gambling predictions.
Certain problem gambling programmes frame the distortions associated with gambling as an effect of a poor mathematical knowledge. Some clinicians argue that reducing gambling to mere mathematical models and bare numbers – without sparkling instances of success and the ‘adventurous’ atmosphere of a casino – can lead to a loss of interest in the games, a strategy known as ‘reduction’ or ‘deconstruction’. The warning messages involve statements along the lines of: ‘Be aware! There is a big problem with those irrational beliefs. Don’t think like that!’ But whether this kind of messaging really works is an open question. Beginning a couple of decades ago, several studies were conducted to test the hypothesis that teaching basic statistics and applied probability theory to problem gamblers would change their behaviour. Overall, these studies have yielded contradictory, non-conclusive results, and some found that mathematical education yielded no change in behaviour. So what’s missing?…
Catalin Barboianu, a gaming mathematician, philosopher of science, and problem-gambling researcher, asks if philosophers and mathematicians struggle with probability, can gamblers really hope to grasp their losing game? “Mathematics for Gamblers.”
For a deeper dive, see Alec Wilkinson’s fascinating New Yorker piece, “What Would Jesus Bet? A math whiz hones the optimal poker strategy.”
For cultural context (and an appreciation of the broader importance of the issue), see “How Gambling Mathematics Took Over The World.”
And for historical context, see (one of your correspondent’s all-time favorite books) Peter Bernstein’s Against the Gods: The Remarkable Story of Risk.
[image above: source]
* Heywood Hale Broun
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As we roll the dice, we might spare a thought for Srinivasa Ramanujan; he died on this date in 1920. A largely self-taught mathematician from Madras, he initially developed his own mathematical research in isolation: according to Hans Eysenck: “He tried to interest the leading professional mathematicians in his work, but failed for the most part. What he had to show them was too novel, too unfamiliar, and additionally presented in unusual ways; they could not be bothered.” Seeking mathematicians who could better understand his work, in 1913 he began a postal partnership with the English mathematician G. H. Hardy at the University of Cambridge, England. Recognizing Ramanujan’s work as extraordinary, Hardy arranged for him to travel to Cambridge. In his notes, Hardy commented that Ramanujan had produced groundbreaking new theorems, including some that “defeated me completely; I had never seen anything in the least like them before.”
Ramanujan made substantial contributions to mathematical analysis, number theory, infinite series, and continued fractions, including solutions to mathematical problems then considered unsolvable. During his short life, he independently compiled nearly 3,900 results (mostly identities and equations). Many were completely novel; his original and highly unconventional results, such as the Ramanujan prime, the Ramanujan theta function, partition formulae, and mock theta functions, have opened entire new areas of work and inspired a vast amount of further research. Nearly all his claims have now been proven correct.
See also: “Do not worry about your difficulties in Mathematics. I can assure you mine are still greater,” and enjoy the 2015 film on Ramanujan, “The Man Who Knew Infinity.”
“There is a sociology of horses, as well as a psychology”*…
Clubhouse Mezzanine
On a cool and sunny Wednesday afternoon in December 2013, I pulled into a massive parking lot in Inglewood, California. My plan was to photograph Hollywood Park Racetrack before it closed forever. At the time, I was a portrait photographer and had spent many years capturing the subtleties of facial expressions, watching carefully how happiness, sadness, anger, fear, and surprise unfold in the muscles of the face. The work of portraiture is exhilarating but also profoundly exhausting, and I was interested in shifting my attention to buildings, particularly buildings that had been lived in and well worn. I liked the idea of working with less, and also working alone, and I was curious, too. What does a building reveal? How is a building like a face?
Growing up in Los Angeles I had spent many evenings right next door to Hollywood Park. I watched Lakers games, basketball at the summer Olympics, and countless rock concerts at The Forum. Although the neighboring track was enormous — 300 acres, a capacity of 80,000 guests — I had never paid any attention until now…
Photographer Michele Asselin spent the next several days intensively documenting Hollywood Park…
It was almost impossible to stop taking photos, but finally, on December 22, 2013, at 11:00 p.m., my hand was forced. The crowd filed out for the last time as the loudspeakers played “At Last” and “Happy Trails.” Some people were crying, some were singing, some were nonchalant. Those trying to filch a little piece of history — a sign or a doorknob — were stopped by a security guard. When the last person exited the grounds, the gates were locked. The horses were loaded into trailers in the coming weeks and moved across town or to Oklahoma, New Jersey, or Kentucky. The auctioneers sifted through what was left, and then, in 2014, Hollywood Park was razed.
After 15 days of circling the grounds, hauling my equipment from place to place, I was 12 pounds thinner and had hardly seen my kids. I had taken 25,000 photos. It would be a year before I finished sorting through them. I wondered what I had fixed in time. The end of something? Evidence of its existence? The traces of time? I tried to keep in mind what an arborist had once told me — that it’s okay to cut down a struggling tree as long as another is planted in its place. I hope that the same is true of buildings…
Jay Cohen. Bugler.
From Asselin’s introduction to her new book, Clubhouse Turn- The Twilight of Hollywood Park Race Track. For the full intro and more of her photos: “Say Goodbye to Hollywood Park: Photographing the Twilight of a Racetrack” and her website.
* Jane Smiley (Pulitzer Prize-winning novelist and horse owner/breeder)
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As we place our bets, we might recall that it was on this date in 1931 that the state legislature in Nevada legalized casino gambling in the state. In fact, gambling had been legal in Nevada until 1909 (by which time it was the only state with legal gambling), when an earlier instantiation of the legislature outlawed it.
(Coincidentally, it was on this date in 1942 that Alfred G. Vanderbilt and number of horse racing luminaries established the Thoroughbred Racing Associations of North America.)
“How about a little magic?”*…
Once upon a time (bear with me if you’ve heard this one), there was a company which made a significant advance in artificial intelligence. Given their incredibly sophisticated new system, they started to put it to ever-wider uses, asking it to optimize their business for everything from the lofty to the mundane.
And one day, the CEO wanted to grab a paperclip to hold some papers together, and found there weren’t any in the tray by the printer. “Alice!” he cried (for Alice was the name of his machine learning lead) “Can you tell the damned AI to make sure we don’t run out of paperclips again?”…
What could possibly go wrong?
[As you’ll read in the full and fascinating article, a great deal…]
Computer scientists tell the story of the Paperclip Maximizer as a sort of cross between the Sorcerer’s Apprentice and the Matrix; a reminder of why it’s crucially important to tell your system not just what its goals are, but how it should balance those goals against costs. It frequently comes with a warning that it’s easy to forget a cost somewhere, and so you should always check your models carefully to make sure they aren’t accidentally turning in to Paperclip Maximizers…
But this parable is not just about computer science. Replace the paper clips in the story above with money, and you will see the rise of finance…
Yonatan Zunger tells a powerful story that’s not (only) about AI: “The Parable of the Paperclip Maximizer.”
* Mickey Mouse, The Sorcerer’s Apprentice
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As we’re careful what we wish for (and how we wish for it), we might recall that it was on this date in 1631 that the Puritans in the recently-chartered Massachusetts Bay Colony issued a General Court Ordinance that banned gambling: “whatsoever that have cards, dice or tables in their houses, shall make away with them before the next court under pain of punishment.”
“Dinner was made for eating, not for talking”*…
Still, talking is, more often than not, part of the program. How to increase the odds that the discussion will be as tasty as the dinner? Alex Cornell has the key:
One of the most complex social situations you will encounter is the 45 seconds that elapse while deciding where to sit for dinner at a restaurant. Your choice should appear natural, unbiased and haphazard if executed properly. Timing is everything.
These 45 seconds determine how enjoyable your next 2 hours will be. Once the pieces start to fall into place and people take their seats, your choices narrow. People sit, seemingly at random, and if you don’t take the appropriate measures, you’re inevitably stuck at the least interesting end of the table.
I have compiled the above infographic to assist you with some of the common configuration patterns…
More at “Musical Chairs.”
* William Makepeace Thackeray
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As we fiddle with our forks, we might recall that it was on this date in 1931 that tables of a different sort became the main event in Nevada, when the economic pressures of the Great Depression (and the opportunity to entertain workers arriving to build Hoover Dam) moved the state legislature to legalize gambling. But it wasn’t until after World War II, when Bugsy Siegel decided to go (sort of) legit and took control of the Flamingo Hotel in Las Vegas, that the Land of Casinos began to glow in the way that, to this day, it does.
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