Speculation and the Risk-Preference: A Comment

Abstract

IN THE interest of clarification of the concepts of speculation and of gambling, exception should be taken to certain of the conclusions set forth in the article Speculation and the Risk-Preference, by Harold Barger, in the June, I938, issue of this Journal. He states in his first paragraph that is convenient to class as gambling the bearing of those risks which do not owe their existence to the production of other forms of wealth; and he assumes tacitly that short sales in the stock market and in the commodity-futures markets fall in this category. At first glance this reasoning seems plausible, but actually it is unsound. It loses sight of the fact that in certain circumstances short selling may contribute to the production of wealth by helping to bring prices closer to the level justified by the then existing conditions. On the other hand, short sales admittedly may drive prices to unwarrantedly low levels, but in either event short selling, as well as other speculative trading, is definitely separated from gambling. Mr. Barger's concept differs materially from the widely entertained notion that an indeterminate proportion of the organized trading in stocks and particularly in commodity futures is gambling. In the case of futures, the claim is commonly made that many of the transactions are gambling because comparatively few transactions are settled by delivery of the commodity on the futures contracts. With respect to stocks the reasoning is less clear, but probably it would be claimed that at least the transactions in the shares which are traded on margin and which do not leave the brokers' hands would also be considered as gambling. This impression has been widely circulated in economic literature, especially with respect to the trading in futures, and has colored many writings of a popular nature. In popular thinking the feeling has probably been strengthened by the failure to distinguish between the legitimate trading in stocks and futures and the bucketshop gambling in these things. This second notion is also untenable, in my opinion, and I believe