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Gambling in Finances


Gambling in Financial EconomyGame theory in its more modern forms, can frequently be used to exploit chaotic environments. Game theory was developed to analyze how one individual can benefit from the losses of another individual. If we were to look at capitalism – as an example – we can see that frequently, game theory can be used to analyze how people can benefit from a financial crisis. If they have the resources or the means, an investor or group of investors may induce a “run on the banks” whereby panic is spread in the financial system, leading depositors to withdraw their money from the banking system.

The Great Depression saw a run on the banking system of the United States of America that resulted in a collapse in the world economy. It started in 1929. When President Franklin Roosevelt came to power, one of his first addresses to the American people over the radio (his speeches of this kind came to be known as “Fireside Chats”) encouraged the public to have confidence in their banks, and to place or keep their deposits there so that the banks could remain solvent.

Because the deposits in banks are usually only a fraction of the bank’s assets (the rest of the cash being tied up in loans, bonds, and other financial instruments), the bank can no longer remain solvent if everyone is withdrawing their money and – figuratively or in actuality – hiding it under the mattress. These runs on banks are often the result of panicked regular savers making withdrawals when they have heard that the bank is in danger of collapse. However, similar methodologies may be employed to devalue the currency of a territory or country. The currency can then be traded at the reduced rate for other currencies, enabling an investor or group of investors to profit massively. Trading currency can be done prudently through careful study of the financial news.

Examining how a country is faring economically allows a trader to hedge his bets or use similar techniques to profit. A currency trader may buy up huge amounts of a currency, and wait for it to increase in value again, before selling off the currency and making a profit. Analyzing the news from financial and media experts such as Reuters or Bloomberg may result in people profiting from the devaluing or strengthening of a given currency – or any other commodity, such as gold or wheat. Both gold and wheat may gain or lose value, as has been seen in the past due to wheat shortages and fold gaining in value.

However, there are more sinister ways to profit financially when it comes to gambling with currency. The spreading of malicious rumors – whether they are true or not – may result in a financial collapse. The Asian economic collapse in the late 1990s and the recession that began in 2007 have been exploited by investors and hedge fund managers, who make profit because of the downturn in the economy. Game theory can be applied in these cases, as certain people profit massively from the losses of others in the environment.