Casino Finance

Casino Finance

Investopedia / Jiaqi Zhou

What Is Casino Finance?

Casino finance is a slang term for an investment strategy that is considered extremely risky. That is, Wall Street offers risky strategies or investments akin to playing the lottery in hopes of hitting the jackpot. It’s argued that casino finance isn’t necessarily investing, but rather gambling. 

Key Takeaways

  • Casino finance is a colloquial term used to describe overly risky investments or trades.
  • This type of investing is akin to gambling, where investors hope to hit the proverbial lottery with their investments. 
  • These investments are high-dollar bets in the markets, either involving high-risk investments, and/or highly leveraged accounts. 
  • The rise of derivative securities has potentially led to an increase in the casino finance mentality. 

How Casino Finance Works

Casino finance refers to casinos and gambling, where players may have little to no control over the outcome of their bets. The terms often refer to large "bets" on investments that are typically high risk, with an anticipated high potential reward outcome. However, as with betting at a casino, the investor could lose it all.

Casino finance generally refers to high-dollar bets in the markets, either involving high-risk investments, and/or highly leveraged accounts. Investors who employ these tactics usually take large risks in order to attempt to earn large rewards. While most investors prefer a more conservative approach, some investors are comfortable undertaking a large amount of risk, in order to have the opportunity to secure large returns.

Special Considerations

An article published in National Affairs, “Against Casino Finance,” notes the overly permissive trading culture that results in casino finance. In the piece, authors Eric Posner and E. Glen Weyl argue that free-market enthusiasts represented best by libertarians, would do well to impose limits on gambling in financial markets.

In particular, the authors cite the rise of derivative securities as being problematic and high-risk gambling. Derivatives are, as the name suggests, built upon other transactions and operate based on a predictive model of these other transactions. The authors cite correlation swaps and the tranched collateralized debt obligation (CDO) products as examples of derivatives used primarily for gambling.

The authors respond to libertarians and other laissez-faire advocates who might want to permit any voluntary transaction not directly harming a third party by arguing that when it comes to gambling in financial markets, many investors have no understanding of the risks they assume. Indeed, they add, it isn’t always clear that they even know they are gambling. Financial-market gambling, the authors claim, “deliberately generates risk to allow people to get ahead without making the productive economic contributions usually required as a condition of acquiring wealth.”

The lack of regulation leaves investors particularly vulnerable; the authors explain that the absence of regulation is primarily due to derivatives' dual nature as a "reckless" gambling device and legitimate insurance. Ultimately, the authors claim, financial-market gambling “sets the stage for systemic crises like the one we experienced in 2008.” The authors call on Republicans and other conservatives to use their track record on limiting other forms of gambling to seek regulations and hobble casino finance activity.

Article Sources
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  1. National Affairs. "Against Casino Finance." Accessed July 13, 2021.

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