Keith Whyte: Understanding Problem Gambling

Keith Whyte of the National Council on Problem Gambling joins Coach Pete to discuss the characteristics of problem gambling, emotional motivations, and its financial consequences. This Financial Safari conversation was recorded in April 2011. Call 800-661-7383 or text PLAN to 600-700. Transcript Automatically transcribed from this episode; timestamps are approximate. 00:00 And welcome back into the Financial Safari, your weekly show aimed at educating you about your money, about your finances, about your financial decision-making, because the more you know, typically the more you get to keep in your pocket. And along with us today, we've got a great interview lined up with Executive Director for the National Council on Problem Gambling in Washington, D.C., Keith White. Keith, welcome into the Financial Safari. Good morning. Thank you. We appreciate you being here, Keith. I wanted to talk a little bit about gambling today. Okay. Let's start with some of the basics. What do you see as the characteristics of problem gambling? Well, it's interesting, and I'll step back a little bit and say that almost all Americans are gamblers. You know, when you look at the statistics, about 75 to 80 percent of Americans have gambled at least once in the past year. You break it down into, for example, weekly gambling, and about 15 percent of American adults gamble at least once weekly. 00:50 So the profile is, you know, it's a broad swath of America. When you look at problem gamblers, that is the 2 to 3 percent of adults who meet criteria for a gambling problem, they're, frankly, you and I. They're more likely to be male. You know, they're more likely to have some education. They're – problem gamblers are more likely to see gambling as a good means of investing rather than entertainment. You know, so there's – and they're more likely to use and abuse substances. So gamblers look like you and I. Problem gamblers obviously have some different characteristics. Keith, you mentioned a couple things there, and you mentioned gambling as investing. And we tend to see that a lot more than 2 to 3 percent really are gambling when it comes to their investments. 01:38 Maybe they're not gambling as an investment, but they're investing, and they don't really realize that they are gambling with those investments. Are Americans realizing that they are gambling when they are doing this? No, I don't think so. I think for a lot of people, and especially in terms and forms of gambling or speculation that are on that continuum, you know, from a pure gamble, which is just like buying a lottery ticket, to something like poker, which involves a lot of skill and money management, to things just across that line like day trading, futures and options. You know, we tend to – one of the interesting heuristic traps about gambling and about life that is applicable for life in general but actually goes backwards for gambling is that the more information we have, the more control we believe we have, the more likely we are to, yeah, put some money behind it, put a lot of money behind it. 02:28 And that – but what we don't realize is that when the odds are against us, even a slight house edge, if you play it a million times in the long term, you're almost guaranteed to lose. So we have some people, some very smart people, to confuse lots of information and knowledge with somehow overcoming a house edge or, you know, a margin call or things like that, you know, that just simply in the long run, if you've got even a 1% negative expectation, but on every bet that you make over the long run, you will be at zero. And so we see a lot of people get confused because they think the more information they have, the better they are to be able to predict the outcome and the better they're able to predict, the more money they'll put on it. But they don't take into account that, you know, if there's a negative expectation there, they're going to lose the more they invest rather than gain. 03:18 So are Americans investing or are they gambling with their retirement savings? It depends. It depends on their motivation. You know, if you have a great healthy portfolio and you've got some mad money and some really risky stocks, but it's a small part of your portfolio, you're covered in a lot of different ways, sure. You know, some risk-taking behavior is okay. And, in fact, that's part of it. You know, you may well get a great reward. But if you're the kind of person that believes that rather than putting that $20 a week into your savings account, you're putting $20 a week into the Powerball because that's your retirement account. You know, that's dangerous. You know, if you're someone – it's a difference between gambling because you can afford it because it's entertainment and gambling because you have to. 04:06 You know, if you've got all your portfolio into super high-risky stocks because that's the only way you think you're going to make enough money to retire, that's an extremely bad case. Just the same way as someone who's – you know, baby needs a new pair of shoes. I've got to make $5,000 this week on the NFL game to pay my rent. That's a hallmark of a gambling problem. And, Keith, when does this reach the point of no return or the critical tipping point there where it's almost too late for someone to turn back? Well, that's a great question. In the gambling field, and this would obviously apply to a lot of investors as well, there's typically generally three phases, the winning phase, the losing phase, and the desperation phase. Anybody who's been in the markets and anybody who's been a gambler knows you're going to win some, you're going to lose some. 04:52 The problem comes when the losing – when you start what we call in the biz chasing your losses, you know, spending more and more money to make back what you've lost. So, you know, if you went in on a stock, if you went in on a trade, it didn't work out, you know, doubling up, you know, to win back, to get back that money you've lost. And typically these are very, very short-term decisions. You know, these are not long-term plays. These are the folks, again, the closer you get to something like day trading, the more likely you are to be on that edge, and you're chasing your money. You know, okay, now I've got to – you know, I just lost, you know, $10,000, now I've got to put $20,000 in to make up what I lost. That's one of the big signs of a desperation phase. And with gambling, as is with investing, you can pour a ton of money into chasing a sunk cost. 05:42 Well, do people reach a point where they feel they can't lose sometimes too? Yeah, absolutely. You know, I mean, there's always sort of a sure bet, you know, which never turns out. You know, all those people that are selling advice, you know, either gambling advice or stock advice, if they were that good, you know, they wouldn't necessarily need to sell it. They could just retire. And, again, the markets, as we've seen, often behave irrationally. You know, we talk a lot about, you know, Taleb's sort of black swans. You know, nobody could have predicted the nuclear meltdown in Japan. I mean, some of these things are just simply beyond our capacity to predict. And so there's always irrationality. And there's usually a hidden edge, a hidden house edge that gets both gamblers and investors. 06:31 Well, talking about the black swan and also the hidden house edge, is it good for people, is it a good strategy for people to take some winnings off the table after they're up? Yeah, absolutely. I mean, I think what you really need to do, and in poker they call it money management, you know, and investing, it's also probably money management. But you need to be able to balance. And, again, you know, you need to learn the rules of responsible gaming. So if you're going to gamble or if you're going to invest, you know, you really need to sit down and thoroughly know what you're getting into. It's funny, we see people, especially on the market side, that learn everything they can about these stocks and the industry behind the stocks and the market drivers. But no one's ever sat down and taught them basic investing 101. Just as many people get into gambling, they may know the rules thoroughly, but they don't really have, or they've never been taught, like, good, responsible gambling strategy. 07:23 And things like not chasing your losses. You know, things like setting the limit of time and money and sticking to it. You know, those are the two hallmarks of combating behavioral addictions, of making sure that you gamble or investments that can become risky, that you're taking the steps you can to moderate and minimize your risk. Because once we also know from the gambling world, especially, once you're gambling, once you're investing, you really lose a lot of that capacity to make those good, informed decisions. And that's why having preset limits, you know, where they're marginally, you know, and, again, the financial world offers lots of examples of ways you can say, you know what, if I'm chasing this hot stock, you know, I may not be making some great decisions. 08:08 But if I know I'm only going to spend X amount of money and time per day, per session, trading or playing poker, that's a great way to help you, help set your limits when you're cool, rather than trying to remember your limits when you're hot. Right, right. Well, let me ask you this. Is overconfidence a culprit in people losing money? Absolutely. Overconfidence is, and, again, this is one of these heuristics that really serve us well in almost every area except gambling and investing. You know, if we really thought about the odds, you know, you wouldn't get out of bed. Life is a six-to-five bet against. But, you know, we are. In general, you know, we're very confident. In the United States, I think especially, we've raised a nation of entrepreneurs, of risk-takers, of warriors, you know, innovators. 08:54 And I think for a lot of these folks, overconfidence is part and parcel of what they do. And if you fall, you get back up and you try it again. However, when there is, if you want to call it a house edge, the more you gamble, the more likely we are to lose. And problem gamblers believe that they are better and more skilled and, more importantly, luckier than everybody else. Now, we all believe, you know, we all believe that we're better drivers than everybody else. You know, for example, everybody that drives faster than me is a maniac, and everybody that drives slower than me is an idiot. You know, so we always believe in our own performance better. And lots of generations of games have taught us that, you know, the more you know about something, the more you practice, the better you get. However, when gambling, when the odds are against you, the more you play, the more likely you are to lose. 09:41 And so that overconfidence, and especially with skill-based games like poker or going to the track, you know, people will place a lot more money on an event where they believe they can control and predict the outcome. So, not necessarily being the case, but let's say the premise is having more knowledge of the rules and of the game help you not lose as much or win more. So, can you compare to us somebody who goes out and maybe gambles $20 to $100 and knows that they're gambling versus somebody who has all of their money in the market and doesn't really realize that they are gambling? I think that's exactly right. And a lot of it goes to, you know, you can improve performance, obviously, with knowledge, but only to a certain extent. And realizing that in both life, the markets, and in gambling, you know, there's never 100%. 10:30 You know, it's never, it can't be a sure thing. So, you know, realizing the limits of how much knowledge can help you and how much you can improve. And realizing, you know, frankly, whether it's pot odds or expected rate of return, making sure that you're not, you don't have too much money on the table. You don't have too much money invested. You know, it's not that we're saying investment or gambling is bad. In fact, quite the reverse. It can be fun, entertaining, profitable, and even, you know, especially with investing, essential to assuring a secure retirement. But you can't have all your retirement invested. You know, you can't be betting everything on the next grain options because that's a recipe for disaster. And even if you win initially, and people can, you can make huge, wild bets and nothing bad will happen. 11:19 You know, you might make great windfall profits. But if you get accustomed to doing that, if you need to do that, you know, if you're unable to control your ability to make these massive, large bets or massive, large investments that are risky, that's when, that's why it's the motivation to gamble and it's the control that you're able to exert. You can make all the wild bets you want if you still have good capital and if you're setting a limit and sticking to it. You know, if you're not doing it because you have to make that money, but because that's money that you can afford to gamble with. He is the Executive Director for the National Council on Problem Gambling in Washington, D.C., Keith White. And Keith, thank you very much for being here with us and talking with us about the emotional motivations for gambling. 12:04 We certainly appreciate your time. My pleasure. Thanks, Coach Pete. Thanks. Appreciate your time. Look forward to having you on again in the future. Absolutely. My pleasure. All right. Have a great day. Have a great day. See omnystudio.com/listener for privacy information.