Binary Options, Gambling, and Economic Risk

# How are bets and high-risk investments conceptually different, and how does this apply to binary options?


# How are bets and high-risk investments conceptually different, and how does this apply to binary options?












They look pretty similar to the layman's eyes: You have to pay something, and then a non-deterministic (or non-fully-known) event occurs. Such event has a (perhaps unknown) probability of occurring and, if the event falls on your side, you get certain money back.

However, when I see many sites like those trading binary options (which seem to be trending topic), I see the regulatory agencies are not related to bet, but to security exchanges.

Right now, the layman is me, and I cannot fully explain the difference to another layman, in particular regarding binary options, in academical terms.

How can I make clear to them that a binary option is not exactly (I mean: in the background - what happens after placing position) a bet in the way betting red/blue in an online roulette? (OR perhaps I am wrong... please correct me in this point)

## Answer by Alex C (score 2)

https://quant.stackexchange.com/a/29916

The main difference is that with a binary option you are betting on a real economic risk, that exists independently of the bet. (For example, even if options did not exist, if stock prices go down pension funds will suffer losses, if the price of oil goes up Venezuela and Saudi Arabia will benefit). With gambling you are betting on an artificial risk, such as the toss of a coin, or the spin of the wheel, that has no no economic significance (no one wants to hedge it) and has been created only for entertainment purposes.

Having said this I would add that binary options seem to me far less useful for hedging (or other economic) purposes than the other types of options that I know. So they seem to me harder to justify. In some countries they are popular because of fiscal (tax) advantages, which I would consider a "bad reason" from a social point of view.

So it's a controversial issue.

## Answer by berkorbay (score 1)

https://quant.stackexchange.com/a/29950

The true difference between gambling and investment is the nature of the underlying probability distribution in my opinion.

In gambling, you know the exact probabilities of outcommes behind every game and no deliberate actions can shift these probabilities. For instance, a coin toss in a perfect environment (sorry about the academic peculiarity) is 50% chance for heads and 50% chance for tails. With roulette, similar setting. With dice, similar setting (see Chevalier de Mere problem for instance). With lottery, similar setting. You get the picture.

But for some other games, it is a combination of luck and skill. For instance backgammon is played with dice but still you can use your skills to alter the outcome (assuming you don't know the practically infinite outcomes of all games and their associated probabilities).

In finance, you take bets but you have only an idea about the underlying distribution. This is true for binary options, leveraged forex, stock trade or any related business. True probability distribution is unknown. So it is not pure gamble.

This is the only objective distinction I can think of.

ps. Binary options can be thought as special cases of barrier options and barrier options are used for hedging purposes.

## Answer by Woraphon T (score 0)

https://quant.stackexchange.com/a/32359

Binary Option on stock is not a pure gamble if you can incorporate new proven information on stock that improve change of winning.

Flipping a coin, is just pure luck. Probability of winning is not changed no matter what opinion you think about it or how smart you are or what information you have.

But for binary option, if you think that stock price will go up because you have economic reasons or inside information to support your believe. Binary Option is not a pure gamble anymore.

If you have advantage on information, given that information, it will improve probability that you will win. I'm talking about Conditional Probability.