A World of Chance: Betting on Religion, Games, Wall Street by Reuven Brenner, Gabrielle Brenner and Aaron Brown

Author: Reviewed by Andrew McCulloch

A World of Chance: Betting on

Religion, Games, Wall Street

by Reuven Brenner, Gabrielle

Brenner and Aaron Brown.

Cambridge University Press.
Paperback. ISBN-10: 0521711576
ISBN-13:9780521711579. RRP: £18.99
Published November 2008. 352pp.

6 tables. Dimensions: 228 x 152 mm

This book is mainly concerned with the value of betting to individuals and to societies. In the UK, the tax revenue from betting is certainly a significant source of income for the chancellor. Government statistics show that, in 2010, total tax revenue from betting and gaming amounted to more than $1.5 billion, or slightly more than 1% of GDP. The largest single source of revenue was lottery duty which contributed more than £683 million to the chancellor, followed by general betting duty (£334m), amusement machine licenses (£218m) gaming duty (£171m) and bingo (£99m). Pool betting duty contributed a relatively meagre $24 million. Figure 1 shows how the revenue collected from different sources has changed over time. The most notable feature is the decline in the main sources of revenue with a steep decline in pools revenue coinciding with the introduction of the lottery (November 1994). The level of receipts from amusement machine licenses and gaming receipts has remained roughly constant in real terms while receipts from bingo have fallen somewhat since the early 2000s.

In this book the authors argue that, at the level of the individual, gambling is good because it gives hope of significant wealth to those who have no other prospect of becoming rich. Individual utility (which motivates the decision to bet) is assumed to be a function of the level of individual wealth (and not consumption or happiness) and the gap between current and desired wealth. It is argued that betting is therefore a rational strategy for individuals whose actual incomes are significantly less than the desired level and who have no alternative means of gaining substantial wealth. It is further argued that a society that encourages betting and other forms of risk taking is more innovative and economically successful than one in which the taking of risks is highly regulated by government. In particular, unregulated financial markets help to efficiently allocate resources to their most productive uses, from investors with spare resources to companies trying to raise funds for investment. From this viewpoint, the authors criticise the comparatively strict regulation of betting by government in America, arguing that regulation is motivated by the desire to protect valuable sources of government revenue which would be lost if there was a more open betting market. The over regulation of betting results in a welfare loss both to the individuals who are denied the opportunity, however small, of becoming instant millionaires and to society, through an overall reduction in risk taking and entrepreneurial flair.

These views are underpinned by the authors faith in the efficiency of free markets which is, however, certainly open to debate. All investment is characterised by risk since the performance of companies cannot be exactly predicted. In many situations, however, these risks can only vaguely be understood. This point was stated by Greenspan (2004):

“In pursuing a risk-management approach to policy, we must confront the fact that only a limited number of risks can be quantified with any confidence.” (p 38)

The uncertainty attached to professional investment inevitably leads to speculation. This may or may not be a problem. As Keynes famously wrote in Chapter 12 of The General Theory (1936):

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise is a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

The aim for government seeking to improve the efficiency of financial markets is to minimise avoidable uncertainty. The deregulation of financial markets in the 1980s, however, made this more rather than less difficult. While it became easier to buy and sell assets, the scope for speculation (or betting) also increased. Statistical models were developed to quantify investment risk, but the quality of these models was much lower than assumed (Danielsson 2008. Blame the models. Journal of Financial Stability 4, 321-328).

As a consequence of their inability to understand the risks of different type of investments banks took on huge debts that were largely backed by American house prices. When these started to fall and with assets of uncertain value, banks stopped lending to each other, leading first to the financial collapse of 2008 and subsequently to attempts to introduce regulation of risk taking by banks. In all fairness, it should be noted that the book was first published in 2008. Although I doubt the authors have changed their views since then, the advocacy of gambling as a route to economic success would now seem foolhardy to most members of the public, if not to the average banker.