Are you investing or gambling? Here’s a checklist

When New Delhi-based doctor Vineet Verma (name changed) wanted to set up his own clinic in 2022, he needed a large sum of money. A friend introduced him to futures and options (F&O), and though Verma knew nothing about derivatives, he jumped in with ₹40 lakh because his friend claimed to have doubled his money in a short time.Soon enough, Verma suffered massive losses. Shocked, he put in more money to recoup the losses. When this sum disappeared as well, he sold his car and re-entered the market, angry and vengeful. Within six months, he was down by nearly ₹1 crore and was ready to sell his house. This is when his wife intervened and they approached a psychologist. Verma is in recovery mode now, the loss irredeemable.While this may seem like a unique case of reckless investing, it’s a mounting reality for many Indians wanting to make quick money, be it for thrill, financial emergency, driven by greed, or incredibly enough, as an investment option for financial goals.According to a study released by market regulator Sebi in September, nearly 93% of more than 1 crore individual F&O traders incurred average losses of around ₹2 lakh per trader between 2021-22 and 2023-24, while the top 3.5% (4 lakh) loss-makers faced an average loss of ₹28 lakh per person.The upward trend in the markets for the past few years hasn’t helped. “In the 3-4 years after the pandemic, new equity investors have experienced a broad-based rally without significant volatility. When most investments are making profits, it gives people a false sense of overconfidence and the thrill of making quick money,” says Abhijit Bhave, managing director and CEO, Equirus Wealth. medium116135509Considering the magnitude of such losses and the manner in which these are incurred, could it be considered investing or does it lapse into gambling? Is there a clear distinction between the two, or does the transition from one to another take place imperceptibly?“If someone doesn’t know why he is investing and doesn’t understand the product in which he is investing, he can’t know the outcome and is playing blind. Gambling is essentially about playing blind and taking a chance,” says Dinesh Rohira, CEO & founder, 5nance.com.Adds Atul Shinghal, founder & CEO, Scripbox, “In today’s fast-paced digital world, various financial products and activities have become easily accessible, often blurring the lines between investing and gambling.”While many high-risk, high-return options such as F&O and cryptocurrencies act as a magnet for people, there are other factors that contribute to the slide from investing to gambling. These can range from cognitive biases and personality traits that make people predisposed to such behaviour, to sheer ignorance about investing options. All these ultimately result in massive losses for investors, impacting their financial goals, families, lives and livelihoods.If you think you too are at risk of falling prey to these temptations, but do not want to lose your hard-earned money, this story is for you. Here, we shall try to explain the difference between investment and gambling, and list the red flags that can prevent your descent into the latter and help protect your wealth. medium116102765Investment vs gamblingOne of the main differences between investing and gambling is whether your investment is based on a clear, long-term strategy or you are riding on pure chance and focused only on winning. Another differentiator is if you are taking calculated risks, or are so focused on rewards that you haven’t considered the excessive risk that can wipe out your savings.“If done with knowledge and risk assessment, it is an investment, whereas gambling is the act of putting in money with the sole purpose of winning,” says Nayamat Bawa, founder, La Esperanza Psychotherapy & Counselling, Chandigarh.“To a layman, gambling and investment in risky products appear to be two sides of the same coin, but they are different. The difference lies in one’s purpose or reason for investing, one’s thoughts at the time of investing, and the product one is investing in,” says Dr Ruby Ahuja, consulting psychologist and founder, Cognitivee.So, if you have no idea about the reason or product you are investing in, do not realise the outcome of your actions, and don’t know when to stop, you are essentially gambling.“Two common behavioural traits in gambling are recklessness, without caring for consequences, and not knowing when to stop. Smart investors, on the other hand, will invest in very high-risk products only as much as they are willing to lose completely, setting realistic loss limits on their capital,” says Bhave.“When the behaviour associated with investing mirrors that of gambling, such as chasing losses, compulsive trading or experiencing emotional highs and lows, it can be considered gambling,” says Shinghal.Red flagsRecognising the red flags of risky investing behaviour that are akin to gambling is crucial to stopping oneself from falling into these patterns.1. Investing for wrong reasonsIf you don’t have a rational, well-thought-out plan to reach a certain financial milestone with a good estimate of the risk involved, you are bound to veer into gambling. Here are the warning signs you should pay heed to.Quick gains and greed: If your only concern is making a large amount of money, as fast as possible, with no regard to risk and no knowledge of the investing product, you are most certainly headed for colossal losses.“Constant preoccupation with gains can lead to poor decisions like taking loans, spending all your money, and secretive behaviour around financial activities,” says Bawa.Pune’s Saksham Singh knows it well. He entered the market in 2020 to earn more to buy a bigger house, but did not take his wife into confidence. He not only lost ₹40 lakh, but his sleep and self-esteem as well. It was only when his spouse noted his rising anxiety and inability to sleep that they approached a counsellor. medium116102803Thrill and dopamine rush: This is one of the biggest traps. “The excitement of high returns on a small investment can be very enticing. This risk-reward dynamic triggers the release of dopamine, a neurotransmitter associated with pleasure and reward, making the experience highly enjoyable,” says Shinghal.Ahuja agrees. “Risky behaviours are usually emotionally charged and stem from our need to seek thrill. The unpredictability and uncertainty associated with these activate the brain’s fight-or-flight response, making the experience inherently exhilarating,” she says.Winning also gives a temporary sense of euphoria which can be a distraction from a deep trauma or some emotional distress.Following the masses: Much like Verma, many investors are sold on their friends’ or colleagues’ claims of large profits made via trading, F&O, crypto, startups, etc. However, what is usually not shared is the heavy losses suffered by them on investments that they didn’t understand. Do not run after social media influencers bragging about their crypto wins or penny stock profits, or chase stocks that the masses are enamoured by.“[Investment guru] Peter Lynch said that one should be cautious when the liftman and office boy start giving you stock tips. It’s a bad sign when everyone only wants to be a buyer,” says Nehal Mota, co-founder and CEO, Finnovate. “If promoters, institutional investors and family offices are selling out and small investors are buying, it’s not a good sign. If every media channel and newspaper is singing paeans to a new investment idea, it’s a hard-sell,”2. No knowledge of high-risk investment optionsIf you have no idea how an investment product works, don’t invest. This is especially true of high-risk options such as F&O, cryptos, day trading, penny stocks, small caps, sectoral funds, non-fungible tokens, or online betting, where the high returns appear attractive, but can also lead to massive losses.“Any investment made without knowing the downside risks or keeping in place a stop-loss can lead to gambling. This is also true of derivatives, where the gains and losses can be disproportionately high but, in most cases, the entire capital is wiped out,” says Bhave. Even unlisted stocks and startups have begun to catch the fancy of investors who put in money without due diligence and end up with big losses.“Speculative excesses happen when the decision to buy is not backed by rational value considerations. Just three years ago, global investors were willing to pay $22bn for Byju’s. Today, it may be worth nothing. The only consistent part of the story is that it was always a loss-making company,” says Mota. medium1161028203. Emotional responses and cognitive biasesThese are one of the biggest red flags one needs to take note of because they often strike subconsciously and without warning, making them difficult to control. These include behavioural biases and deep emotional reactions.“You may be able to control the why and how of investing if you are disciplined, but one of the practical problems of gambling is when the conviction to prove yourself right becomes bigger than the conviction of the investment or trade,” says Rohira.So, just to prove you made the right choice, you may refuse to let go of a falling stock or an underperforming fund. Or, continue to put good money after the bad chasing losses as you are more deeply affected by a loss than a win (loss aversion bias). Or, you believe that you can influence the outcome through your skills even when the odds are stacked against you (illusion of control bias).Similarly, emotional responses triggered by anxiety, fear, anger or desperation can lead to irrational and poor investing choices that inevitably result in losses. If you are aware of your reactions, avoid high-risk investments.4. Personality traits“Some people are more predisposed to risky behaviours due to a combination of psychological, biological and environmental factors,” says Dr Ahuja. Individuals high on impulsivity, sensation-seeking, or novelty-seeking are naturally drawn to high-risk scenarios, while overconfidence or a limited understanding of risk can amplify risky decision-making, she adds. If you are aware of these traits, it may be best to stay away from risky investment options. medium nocaptionhttp://youtu.be/q9HJgsrMbLg?si=lP4qDI803kSJrnWlHow to avoid itOne should first accept that there is no shortcut to building a safe corpus. One must not only take time and effort to educate oneself about investing options, but also adopt safe practices, especially while dealing with riskier products.Focus on goals, invest for the long term: Your best bet to protect your investments is to align these with your financial goals and time horizon. “Ask yourself if the investment fits into your long-term financial plan and meets your risk parameters. If it doesn’t, then it is best avoided. This is a good suraksha kavach against getting caught up in excesses,” says Mota.Limit exposure: “You should not have more than 20% of your investible surplus in riskier options such as F&O, penny stocks or cryptos. It should be the capital you are willing to forego,” says Rohira. Agrees Bhave, “One should have a small part of the capital earmarked for speculative activities and the balance should be invested for the long term and diversified across asset classes. By maintaining this balance, one can pursue the appetite for risk while safeguarding the overall portfolio from substantial losses.”Set safeguards: “You must define stop-loss limits in all high-risk assets and it should be logically defined. You can’t buy penny stocks and say your stop-loss is 10%. It is bound to hit the stop-loss limit. You should be ready to take a 20-25% cut in a penny stock,” says Rohira. Similarly, know when to stop chasing losses in any risky investment.Diversify: You should diversify across asset classes to ensure that even if you incur losses in high-risk options, your portfolio will continue to be safe and on track. “It not only reduces the impact of market volatility, but also ensures that investments are aligned with financial goals, time horizon and risk tolerance,” says Bhave.Seek counselling: If the losses become untenable and start to affect your family and financial life, seek professional help. Hire a financial adviser to get your finances back on track and seek cognitive behavioural therapy to address the underlying issues and develop healthier coping mechanisms. medium116102845 medium116102524Red flags: How biases lead to gamblingThese cognitive biases and traits at different stages of investing can turn the process into a gamble.Stage 1: Reason for investingSensation-seeking: This personality trait makes people look for exciting and intense experiences, typical of gamblers. This usually translates to different, high-risk investments like futures & options, day trading or cryptos.Greed, or desire for quick, big gains: This need for ‘making a killing’ drives most gamblers, as well as investors with no knowledge of products, or those in financial distress.Social proofing: This is a psychological phenomenon where unsure investors mimic those who have had good experiences in a particular type of investment. So, when they see people making huge gains in crypto or penny stocks, they will follow suit.Stage 2: Product selectionHerd mentality: Investor segments with no knowledge of investing and low socio-economic profiles typically follow what the masses are doing. If you don’t know why or how you are investing, it’s a gamble.Survivorship bias: This bias makes people invest by focusing only on selective information put out in the public. So, when friends or influencers declare the fortune made via day trading or derivatives without mentioning their losses, people rush to make poor investing choices. medium nocaptionhttp://youtu.be/DKnT6e63-20?si=3ZpeUU1b17qeCLu1Stage 3: Early returns (in case of profits)Illusion of control bias: A bias common to gamblers, this makes investors believe they can control the outcome of an investment when, in fact, they can’t. This leads them to invest more in an instrument that they may know nothing about, and result in losses.Optimism bias: This makes a person overestimate the likelihood of positive outcomes and underestimate the possibility of negative results. So, early profits give the illusion of ability and belief that they will always win.Stage 4: Mid-stage returns (massive losses)Revenge trading: This is a trait that makes people dig a deeper investing grave for themselves in an effort to redeem their losses. Angered by a loss, they invest more as a way to avenge it, almost always ending in a bigger loss.Emotional instability: This trait is typical of gamblers who are impacted very strongly by even small wins or losses. In investment, it translates to irrational decisions and imminent large losses.Stage 5: End stage (compounding losses)Loss aversion bias: This bias makes people averse to losses because losing a small amount affects them more deeply than earning a bigger amount. To redeem the financial loss and fallen pride, they keep investing in a losing stock, putting good money after bad.Gambler’s fallacy: This bias, very visible in gamblers, makes an investor believe that a random outcome is more likely because a series of opposite events has happened. So, if they have been incurring losses in a stock for a long time, they are convinced that it will make a comeback soon.