Understanding gambling to become a smarter investor

December 12, 2025

Matt Adamson

Portfolio Manager

“Improving decision quality is about increasing our chances of good outcomes, not guaranteeing them.” ― Annie Duke, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts

Investing is the art of decision making. More specifically, decision making under uncertainty.

Any investor with a long enough track record will learn that fortunes are made and lost on well-laid plans that did or didn’t work out.

Does it all come down to luck? Or can we truly become skilled at investing?

Perhaps we can learn lessons from some other practitioners of chance and uncertainty: gamblers.

The intersection of investing and gambling

Investing and gambling share many similarities; unknown outcomes, randomness, and risk are common to both.

Not surprisingly, strategies that gamblers use to navigate games of chance can also be useful to investors.

The most foundational strategy is learning to view the world through the lens of probability.

Seeing the future as a set of many possible outcomes helps us more properly evaluate the biggest thing we must manage in investing: risk.

Also, learning to think in a probabilistic way gives us the proper frame of mind to evaluate opportunities.

Perhaps the best way to illustrate this principle is to contrast it with its opposite, a deterministic mindset.

	Deterministic thinking	Probabilistic thinking
1.	I win by beating/outsmarting other people (zero-sum thinking).	I win by properly playing my hand.
2.	I spend my time creating a perfect forecast/knowing what will happen.	I spend my time understanding all potential outcomes (risk-based thinking).
3.	I create my portfolio to maximize profits based on my forecast.	I create my portfolio to maximize profits and minimize risk across many scenarios.
4.	Investment skill is equivalent to foresight, which maximizes my profits.	Investment skill allows me to evaluate risks and identify how to profit from or hedge those risks.

Rules of investing

Once we have learned the skill of thinking probabilistically, we can build on that with some other basic rules of investing.

Rule #1 – Avoid Ruin

Perhaps the most obvious of all the rules is to avoid ruin (a.k.a., don’t run out of money).

While this seems like an easy task, the investment world is full of tempting products and strategies that can quickly lead to ruin, a total or irrecoverable loss.

Some examples include:

Failing to diversify – Having too much of your net worth in an investment with the potential for catastrophic losses. Namely, individual stocks and bonds that can crash or go bankrupt.

Accepting asymmetric payouts – Certain options strategies fit this category, where there is a high frequency of small gains but a small chance of total loss.

Investors should always make sure that upside and downside are proportional and avoid contracts with the potential for total loss, even if the odds are small.

If there is a chance you could lose everything, eventually you will.

Using leverage – The investment world is full of leveraged products designed to amplify upside for investors. Always remember that if an investment can go up quickly, it most certainly can go down — usually even faster.

Rule #2 – Understand Your Odds

Another critical rule for evaluating uncertainty is knowing the odds of the game. In gambling, this means having a laser-sharp understanding of the odds and payouts of a game.

Unfortunately for investors, there is not a finite set of possible outcomes like the cards in a poker deck.

While we cannot know returns and risk with perfect foresight, investors can be students of history.

Manias, crashes, and long periods of poor performance are not new. By studying these past events, investors can improve their ability to estimate future outcomes and assess risk.