Color me confused, but I’ve never really understood the difference between a bet and “financial trade.” And if there ever really was a line, it’s definitely becoming blurrier.

In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south — and this hasn’t raised an eyebrow. But when an Aussie bookie began offering bets on whether the Australian economy is headed for recession, he stirred up a bit of strife.

Federal Treasurer Wayne Swan called the bookie’s actions “utterly irresponsible.”

The contrast between the Treasurer’s response to financial trades and bookies’ bets provides a nice example of how people respond differently, depending on how a bet is framed. One is modern finance, while the other is a repugnant market. Both, of course, are simply state-contingent contracts.

But I’m also confused for another reason. The Aussie economy is now a strong odds-on favorite to slide into recession. In fact, if you are betting on a recession, you would have to bet $5 just to stand a chance to win $1. But after its recent interest rate adjustments, the Reserve Bank of Australia declared that the “size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer.” That’s antipodean boffin-speak for: there’s no more interest-rate cuts to come for at least a couple of months.

Put the facts together: Despite a near-certain recession, the Aussies are leaving interest rates at 4.25 percent. Are the reserve bankers content to stand by as the recession wreaks havoc, or are they simply confident that they are smarter than the punters? Either way, I’m worried.

By the way, a few years back, Refet Gurkaynak and I studied a related betting financial market run in the U.S., and we found that its economic forecasts were typically more accurate than the consensus drawn from expert economists.


So, what is the difference between a bet and a call option? Whether the guy making it wears a tie and whether the bookie sits in a corner office?


It is a scam of sorts. The "authorized" players can take and make bets, as well as make money from the commisions being paid to make the bets. But the "unauthorized" players are nothing but low-life gamblers, to hear some say.

The truth is that if everyone was indeed playing fair--that is, bets were kept and honored, etc.--it's the same thing! Oh, except maybe the government doesn't get as big a cut, or big business doesn't, etc.

Further, the barriers to become a "legitimate" business involved in the stock/commodities market is so high that only the elite can get in, even though they are doing nothing very different than saying, "You want to place a bet that the Colts will beat the Bucs?"

If anyone wants to fund me for a new stock exchange that would make about what the current one makes...look me up at


Australia has the problem that their ability to lower their interest rates is limited by how far their currency has fallen in recent months.

Kenny McCormick

You bet with your own money and you call options with your client's?


I think this is kind of the situation Michael Moore was dreaming of when he described "White Collar Cops".

The question, however... is money placed on a call option (or a put) "invested" into the economy, or held privately? In the case of bookie, the money might as well be sitting under the mattress until it's time to pay up (or not), and even then, might not be injected into the economy once collected.

I think that may be the important difference.

Mike B

My friend recently mentioned that in most economic downturns there are still ways to make money (selling short for example). However, he realized that he could not find a way to make money if the entire global financial system collapsed using normal market instruments. I suggested he try a bookie and make a bet with basic foodstuffs instead of currency.


To your last paragraph, perhaps in the mind of the economists there is a hidden sense of consciousness or even guilt at laying down the bare truth ("Head for the hills!") for fear that their intervention might accelerate something they personally see as inevitable. Similar to the doctor telling the terminal patient "It's going to be alright". Economists are also human and subject to Social proof pressures - outlying opinions are more likely to be inappropiate thogughts than whatever is mainstream at the time. This is also a communications stream so the view that media wants to portray plays a part - and needless to say can be manipulated by shifting the opinion of socially influential economists and pressing on that wonderful social proof button.


I can see a regulator's POV: a financial firm has a license to trade futures, etc. and it would not be good if anyone could start issuing securities - which is what a bet on the economy becomes.

I'm not sure the logic strictly applies, though, because the bet offered here is a literal short on the economy, not on say an index or other tradable financial instrument. It may create a security, which is a problem, but I doubt this is a currently existing security.

Brian R. Murphy

I'm fairly certain that a collection of second graders throwing darts at a data-set generally have more predictive power than a group of economists.

The difference that I would see is that options markets are orderly and cleared through a centralized clearing house where members essentially insure the settlement of transactions. I don't think people's moral outrage is at the idea of betting on a given event but instead all of the attached vices that come along with most unregulated betting circles (drugs, the mob, etc...). Clearing houses also tend not to break your legs if you fail to meet a margin call, which has positive ramifications for society. At least in most cases.


I think the difference is that with financial trading the economy can grow so there's a positive expected value when making a transaction.

With betting (and prediction markets) it's a zero-sum game with a bit taken off the top so there's a negative expected value.

Rick Wash

I think the primary difference is regulation. Participants and market makers in the financial markets have a number of strict regulations that gambling does not. Financial market regulation is trying to protect the economy. Gambling has its own set of regulations, but those are mostly focused on fairness.

I wonder if there is already overlap between the areas that are supposedly covered. How long until the SEC starts regulating the craps tables in Vegas?

denis bider

The very fact that Federal Treasurer Wayne Swan is clueless enough to call the bookie's actions “utterly irresponsible" does not bode well for the Australian economy.

Eric M. Jones

There's not much difference in many things, but we agree to agree that they are different. If I print money it's called counterfeit, if the government prints it, some mystical thing makes it okay. That is called civilization.


I have never understood how options weren't illegal gambling, since they are not based on anything of underlying value being traded.

I have also realized that there really isn't any difference between prostitution and any other form of employment requiring unpleasant or difficult physical labor. We pay professional athletes to do many things with their bodies, some of which may produce a lasting injury or even death, and to do it in public before an audience.

We pay crab fisherman to work in arctic conditions with imminent danger. We don't usually film it, but when we do it's a hit series.

We pay nurses and nursing assistants to perform all sorts of the most intimate personal care on strangers. Things I hope never to have to do for my husband!

We pay all manner of people to do things with their bodies which are unpleasant (like slaughtering fowl), painful, or risk danger or disease. Why is only prostitution illegal?


Phil H

Tucker: the falling AU$ isn't a big deal; it was lower in the past and we got by just fine. A lower AU$ helps our exporters at a time when commodity prices are falling, which is a good thing; in theory, it makes imported consumer goods more expensive, but last time the dollar slipped this low, that didn't occur. Instead, the country's retailers ate the difference in their margins, and prices stayed pretty much the same.

denis bider: Wayne Swan knows perfectly well that he was talking rubbish. His remarks were just a peculiarly Australian form of media management.


Echoing WB, I have always been baffled by these artificial divisions between acceptable and unacceptable forms of labor and speculation.

The one that gets me is insurance- what is it, after all, other than a wager that a certain event will or won't occur? Show me an actuarial and I will show you a white-collar bookie.

Chris J

If you are an airline and you sell a non-refundable ticket for spring break and you do not hedge your fuel then you are betting that the cost won't rise.

Oliver Townshend

Tucker - the currency was down to 50c a few years ago. 70c at the moment, so still a way to go, and all they really have to do is keep the interest rates higher than the US (which at zero leaves a long way).

Mike styczen

Tim - insurance is a great example.

Insurance was illegal under the common law as a form of gambling, it took a series of rulings and statutes to make modern insurance possible. Even today, certain forms of insurance are still illegal, for example you can't buy fire insurance on your neighbour's home because that would be considered gambling.

As far as prostitution goes, I can't figure out why it's illegal to sell something but not to give it away, but that's a discussion for another day.

Michael From China

betting financial market run in the U.S., and we found that its economic forecasts were typically more accurate than the consensus drawn from expert economists.