« Macroeconomics and the Celestial Emporium of Benevolent Knowledge | Main | If S weren't I »


Feed You can follow this conversation by subscribing to the comment feed for this post.

All investing has an element of luck that does not mean it is gambling in the same sense that slot machines are, positive EV versus negative EV. I like the idea of big firms "investing" in plaintiffs that can't afford to hire lawyers, this seems like it would really balance the playing field, on the other hand if the Ontario government tries to balance its books with the "voluntary" tax of gambling this seems like it will cause far more problems than it will solve.

If the leisure industry was a way to use our productivity after we've been satiated with food, manufacturesd products, health care and education, who would or should care? But the point here is to provide opium for the masses.
When I was a grad student, living in the Plateau in Montraél, the borough was stil a mix a students and poor proles and welfare recipients.( The students have graduated, stayed in place, gentrified the lot and cleansed the poors.)The laverie ( public washing machines place) sold Lotto tickets at a booth called "Le coin de l'espoir" ("The corner of hope"). You could say that the middle-class students were gambling on their human capital and the poor on the Lotto, the only way up. Now the middle-class is in the same mindset. They don't gamble for fun. They gamble as the only way to get ahead.
A few years ago, a large casino project for the southwest to Montral downtown was defeated. The business lobbies all decried the "culture of opposition to progress". When the Chamber-of-Commerce types promote gambling over investment, you know you are no longer in a capitalist society.

Unfortunately, the economic history of the last thirty years show that luck ( being born in the right class) trumps hard work. Except the hard work of corporate infighting, seemingly the only way to better your lot.
Petit-Bourgeois values have been proved to be for suckers. Piratical economies can't last.

OK, the problem seems to be the lack of investment and discernment of investment opportunities. There are legions of companies with filing cabinets full of resume. Every place I have worked for had one of these. We do not lack the people who want to work, we lack the management will to hire and employ the capital to enable their work.

We don't have a skills problem, we have a capital problem.

The question of the decade is "What went wrong with our business leadership class?"

Is gambling inherently a zero-sum activity? Granted, the expected value from your typical gamble is negative, but the fact that otherwise rational people gamble suggest that there is a positive expected utility. Put it this way, the expected value of buying a theatre ticket ($0) is a lot less than buying a lottery ticket, but no one suggests that the entertainment industry doesn't increase welfare.

The thrill of gambling? The rush of taking risk? Or for some a simple escape?

The utility gain isn't in the money.

That could be the utility, it also explains why I don't gamble, I hate losing money. I prefer buying a bag of chocolate (I live in a town with a chocolate factory and the outlet store has amazing deals) where the exchange of money for goods has a known value. I give them my money, I get the enjoyment of a pound of chocolate bars.

I suppose if you think in terms of individual utility, gambling is simply a form of consumption. On the other hand, it has a lot of externalities (gambling dependence, with its effects on individuals and families), and it transfers wealth from the poor (for whom the utility of money is high) to the rich (for whom the utility of extra money is lower). Plus, as you say, the activity itself reinforces the view that gambling is a better strategy than say application or education. The growing importance of gambling as a sector, plus the growing importance of it to revenue (here in Australia it has become critical to some states' revenue base) are signalling a shift in both attitudes and in perceptions of the opportunities available for investment. A parallel with the growth of the FIRE sector? A parallel with the dearth of profitable outlets for middle class savings in late C19 Britain and France?

Livio: "This seems to me to be another form of legalized gambling."

As Ian points out, just because an outcome is uncertain, doesn't mean that it is the same as gambling.

I think this generally applies to any process that the person commenting on doesn't understand: health care, investment, law suits etc... It is easy just to say that it is "gambling", but really that is only a coherent statement if what you mean by gambling is any process where the outcome or payoff depends in part on a distribution where the a priori outcome is uncertain.

In fact, it seems to be quite the leap to make to say that because there is an uncertain outcome that: "Of course if luck and circumstance play a role then even plaintiffs with weak cases have a fair shot." I guess it depends on what one means by a "fair shot". If this means that you have a non-zero chance, then sure, I guess, but this doesn't really help to understand a market to say that a poor investment or weak case or whatever has a "fair shot" just because the chance of success is non-zero.

I just wish people would research a little bit more and understand a little bit more before they rip on the law and lawsuits. There is definitely a lot to criticize in how the legal system deals with disputes and remedies. There are also important questions about investing in cases. And I understand that the comments in the original post are musings and I shouldn't take it too seriously, or only as a jumping off point of discussion on the matter.

Peter T: "I suppose if you think in terms of individual utility, gambling is simply a form of consumption. On the other hand, it has a lot of externalities (gambling dependence, with its effects on individuals and families), and it transfers wealth from the poor (for whom the utility of money is high) to the rich (for whom the utility of extra money is lower)."

Gambling does have externalities. On the other hand, since the government share of gambling revenue is effectively a tax on gamblers, you wonder to what extent those externalities are internalized. That would be an empirical question, I suppose.

I'm not sure that it's neccesarily accurate to say that gambling transfers wealth from the poor to the rich (after all, some of the punters in your typical casino are a lot wealthier than the people working there, and, again, the government gets it cut). It may be true, but I don't think we can assume that to be the case. In any event, so what if it is? After all, the same is probably true of professional sports (transferring money from you and I to millionaire players and billionaire owners), the entertainment industry (movie stars, singers, hollywood big-shots, etc), but we'd never suggest that those industries somehow don't increase social welfare.

In any event, I think the purported link between the rise of legalized gambling and investment decisions (i.e., gambling as an alternative to investment) is overblown. The rise in gambling likely reflects a number of factors, including (i) increasingly permissive attitudes towards behaviour which once would have been considered vices (gambling is one example, drug use, pornography, prostitution might be others), (ii) an older population (which is likely to shift from investment to consumption) with more money than they have brains (and I'd be curious to see if casino revenue took a hit in 2009 onwards, as the older population saw a good chunk of its money disappear - I'll be they did) and (iii) governments which have tapped out traditional sources of revenue making promises they can't afford.

I've certainly been enjoying the comments. And don't worry, I think lawyers are people too and we all have to earn a living. Indeed, having investment firms fund lawsuits for plaintiffs with strong cases but without the resources can actually improve justice and market outcomes if there is some type of market failure whereby people are not getting justice. However, do not large law firms to a certain extent already do this with clients who have modest resources by taking on a case and taking their chance that there will be a large payoff? What this new practice may be is introducing a financial intermediary with the resources to help fund even larger suits which at the margin might allow for taking on even riskier and more uncertain cases. Given how the practices of investment firms and bankers contributed to the global financial crisis, I'm certainly leery about how such a practice may add additional work and unforeseen complications to an already overburdened justice system.

"However, do not large law firms to a certain extent already do this with clients who have modest resources by taking on a case and taking their chance that there will be a large payoff?"

Certainly you see contingency arrangement in large class actions lawsuits or personal injury suits, where the law firm gets a percentage of any settlement/award (although there are restrictions on how much lawyers can take - and in many cases, the percentage is potentially subject to review). That said, I'd expect that there would be institutions that are better suited to bear the risk (and more inclined to take it on) associated with financing lawsuits than law firms, so it doesn't surprise me that this market would arise.

In a similar vein, have you ever looked at viatical settlements(http://en.wikipedia.org/wiki/Viatical_settlement)? Basically, they allow people who have been diagnosed with serious illnesses to sell their life insurance policies (at a discount, but at a price in excess of any cash surredner value) prior to their death (typically in order to fund health care costs, etc.). There was a big boom in that industry in the 1980's, in large part to finance the health care costs of people diagnosed with aids. Of course, the punchline was that people with aids started living longer, and investors took it in the teeth.

Bob Smith: Jeanne Calment , who died at 122, has sold her house ona viatical plan while in her 70's. The buyer died almost 20 years before her IIRC...

I remember reading about her. I also seem to recall there being stories about purchasers of insurance policies taking steps to ... shall we say, accelerate... the payout. Obviously the incentives are potentially problematic.

Livio - I may have over-reacted in my defense of the treatment of lawsuits ;)

On another note, I am not a litigator, and in fact do not practice in any related area where I deal with this stuff on a regular basis, but in respect of this thought: "What this new practice may be is introducing a financial intermediary with the resources to help fund even larger suits which at the margin might allow for taking on even riskier and more uncertain cases."

My understanding is that this type of financing is more often done in the context of a case that has already progressed to the point where it is likely that there will be a payout or settlement (ie, that the case is close to a sure thing), but that the financing enables more and better expert reports (which are expensive, and less likely (unable??) to be done on a contingency basis) that increases the payoff. That is, it enables plaintiffs that would otherwise likely be successful because they have a good case increase their return by matching a larger party in terms of experts and investment in developing the case, where otherwise they would probably settle earlier for a lower settlement.

With respect to viatical settlements, it seems strange to me that some people think that it is unethical to try to access a financial benefit before you die. Except for the moral hazard problem expressed by Bob Smith, it seems to me that it is bizarre that in Canada it remains against the law to borrow against a life insurance settlement. It is one of those things that might, at first impression, seem a little bit off-putting or creepy, but when examined more closely, seems arbitrary and unjustifiable.

Legalized gambling probably does tend to corrupt a society, but then our society is being corrupted in so many other ways that I'm not sure it really matters at this point. People need something to keep them occupied and gambling does that. Jobs for those who want jobs, leisure activities for those who have too much time and money on their hands. Is an economy where people work in the casinos for 8 hours, then gamble away their earnings in the same casino (or perhaps the one next door, just for variety) for another 6 hours, then go home and sleep and bathe during the remaining 10 hours of the day, really that much more absurd than an economy where people build cars for 8 hours, then spend 6 hours driving the cars, then 10 hours sleeping and bathing? True human needs are very meager. Food basically. Everything else is discretionary...

One big advantage of a gambling economy, versus say a car economy, is that little in the way of energy and raw materials are required, in relation to the jobs provided. Healthcare, education, lawsuits, financial industry paper-shuffling are also sparing of energy and raw materials but prodigal with labor. That is important, since energy and raw materials are what are increasingly in short supply, while labor is what we have a surplus of.

Bob Smith with whitfit:

Viatical Settlements are illegal in Canada. The Life Insurance industry won't permit those kinds of policies to be sold or to be assigned in order to consummate such a settlement. A life insurance agent who engages in viatical settlements can lose his license. I can dig the specific reference up from my life insurance training books if you wish.

Aside from issues of public policy, viatical settlements contravene the Life Insurance Act, 1774, aka the Gambling Act. This Act is part of the common law of the English provinces and Quebec has parallel provisions in the Civil Code. It simply states that no person may insure in excess of a risk or debt or financial interest that they possess. A person is deemed under the Act to have an unlimited interest in their own life, the corollary being that they cannot benefit excessively from insuring their own life. However of you insure a third party the Gambling Act rule is strictly enforced which is why life insurers demand financial statements for third-party insured interests.

The Viatical settlements model intends for a person to make a profit from a life insurance settlement in excess of their liability (the amount they settled) and are therefore illegal.

"Viatical Settlements are illegal in Canada"

So was gambling, once. The question is, should they be? Other than the "creepiness" factor, it's not clear why they should be. Even then, it isn't clear that a viatical settlement is any more creepy than my insurance company betting against my life when I buy a life annuity.

Also, while settlements themselves may be illegal in Canada, it's not per se illegal for Canadian to invest in, say, US viatical settlements (although there have been issues with people not complying with Canadian securities law in offering them here in Canada).

Should the diversion of 416/905 area gamblers from First Nations-run Casino Rama to a provincial-only OntPlace casino be significant, this might have negative implications for the economy of Northern Ontario, given that many FN communities well north of Orillia receive distributions from Rama. (I learned this when the financials of Attawapiskat were published during the recent media coverage of their difficulties, which included a large chunk of change from that source)

Bob, you missed my point about the Life Insurance Act 1774. Viatical settlements contravene the principle that you can't insure more than you stand to lose. That principle is how the life insurance industry avoided turning into a wild-west derivatives market. In the 1770's that is what happened, people in the UK would purchase life insurance policies on celebrities as a form of gambling. The 1774 Act outlawed this.

Second, there is a public policy point that nobody should take mortality risk with financial instruments unless they are ready, willing and clearly able to take that mortality risk. Life Insurance is about mortality risk and it takes a lot to manage it. That is why I applauded the government for shutting down BMO's Life Annuities by another name. Banks are not equipped to take mortality risk and most importantly the customer is not getting a good deal unless their mortality risk is fairly evaluated.

Life Insurance is about the insurance of losses, not about making money through the insurance payout itself.

Lastly, there's nothing wrong with life annuities, it's all about aggregation and pooling. They are great products that deserve to be used more. The problem is when somebody makes money by speculating on a person's death.

Life insurance companies don't speculate, they aggregate. That turns the premiums into an interest-bearing loan where the interest is the risk-contingent mortality based loss on payout. But as Keynes observed when he chaired a life insurance company, while individuals die very unpredictably, as a group we die with mechanical regularity.

That is an interesting point regarding the diversion of gamblers from Casino Rama. There is also concern that a casino in Toronto could undermine revenues for the Niagara Falls casino.


But none of the policy considerations really apply to viatical settlements. After all, they don't involve people taking out life insurance policies on strangers. They involve people buying insurance policies from the insured persons, with their consent. Put it another way. What's the difference between me selling my life insurance policy to a bank (a viatical settlement) vs. me naming a bank as the beneficiary of my life insurance policy (a common enough practice for certain loans)? The first is illegal, the second is not, and yet in both cases the bank gets paid if I croak.

More to the point, what's the difference between someone buying my insurance policy vs. issuing an annuity. In either case, the counterparty makes money if I die young (and loses money if I live a nice long life). I don't think there's anything wrong with life annuities, but I'm confused as to why you think they're fine, while viatical settlements (which involve the same bet, namely that I'll die sooner than expected, in a different form) are verboten.

"Should the diversion of 416/905 area gamblers from First Nations-run Casino Rama to a provincial-only OntPlace casino be significant"

I'd expect that that would be a significant concern, given the number of bus companies running low-cost casino shuttles out of Toronto to both Casino Rama and the Niagara casinos. On the other hand, Toronto might be able to more effectively draw international gamblers than either Niagara Falls or Casino Rama, perhaps increasing the side of the gambling pool (Niagara Falls has the proximity to the border in its favour, but Toronto is closer to the airport and has other amenities to attract tourists - Orillia has nothing, other than a quaint lakeside park in the summer, which is probably not what the gamblers are keen on).

The bank has an insurable interest of fixed and known quantity in you: the loan you have taken out with it. The bank can insure, or you can insure and make the bank the beneficiary of a sum of money no greater than the debt it holds. The bank cannot insurer, nor can you insure more than your insurable interest.

It is also a principle of insurance that insurance contracts involve unilateral risk. The insurance company takes the mortality risk, you cede the risk to the insurance company for a premium.

In a viatical settlement, both the person who receives the life insurance policy and the insurance company are taking mortality risk. This is bilateral risk and it is gambling. The viatical settlor receives the proceeds of the insurance policy which exceed his costs by an amount proportional to the time difference between the viatical settlement and the payout of of the policy. The viatical settlor is taking mortality risk.

Insurers do not allow such gambling with insurance policies. It is not simple settlement of debts, it is speculation. It therefore contravenes the Gambling Act and the body of law that it has created.

Bob Smith and Determinant:

My understanding is viatical settlements ARE legal in the Atlantic provinces and possibly Quebec. This is an area of "provincial" vs federal insurance law. Will try to provide more reference later. In terms of deposit taking and insurance Desjardins and many credit unions in BC provide a European style "bancassurance" model incorpating deposit taking and insurance.(I suspect Desjardins is actually underwriting the risk to a greater extent than the BC credit unions which I suspect are just reselling policies in their branches underwritten by others). Now some will say Desjardins isn't a "Bank" quite true, but Chretien and Martin gave them full access to the Bank of Canada's LVTS system along with Alberta Treasury Branches and Central One Credit Union(Central One does come under OSFI supervision) which aren't "Banks" either.

"Insurers do not allow such gambling with insurance policies. It is not simple settlement of debts, it is speculation. It therefore contravenes the Gambling Act and the body of law that it has created."

That doesn't follow. A viatical settlement is no more speculative than the issuance of an insurance policy - since one is just the flip side of the other. Granted, insurers tend to aggregate risk, but it's not clear why the behaviour of one party should affect the legality of a transaction. More to the point, in practice people engaged in the business of making viatical settlements also tend to invest in a pool of viatical settlements, and so are in the same position vis-a-vis risk as the insurer.

More to the point, you're ignoring the legal form of the transactions. While both the insurer and the viatical settlor may bear mortality risk, they don't do so as part of a single contract (which is what happens when you gamble). The insurance contract still involves unilateral risk, as between the insurer and the settlor. To the extent there is bilateral risk, it is because the viatical settler has taken on unilateral risk in entering into an assignment agreement with the insured party (and paying them upfront for it).

Tim, I'll defer to you on the point. I had a friend who did some research on this a few years ago, but I don't recall what his conclusions were on the point. (I think he was more concerned with the securities law issues associated with investing in pools of viatical settlements, rather the the underlying legality of the contracts).


I'd also question the broad application of the common-law prohibition against gambling contracts (although I think it's been repealed in Ontario) to any contract involving bilateral risk. After all, bilateral risk is the sine que non of the swap transactions that are routine derivatives transactions. I don't pretend to be a derivatives lawyers, but seeing as trillions of dollars change hands as a result of those transactions, I'd like to think that someone has done the due diligence on the point.

In any event, my recollection is that Ontario amended it's laws at some point in the last few decades to provide that gambling contracts are not, per se, void.

Tim: Desjardins, ABTB and COCU may not be "banks" according to the Act but the do pass the duck test ( if it swins like...).
Funnily, a couple of years ago, Desjardins tried a new publicity campaign.
The french one " Desjardins n'est pas une banque" was a success. The english one " Desjardins is not a bank" cost them customers among immigrant communities...

Bob Smith:

I believe one of Ernie Eves final budgets(as Finance Minister) changed or at least clarified Ontario law as regards to bilateral swaps. Historically though the structure of the futures exchanges in Montreal, Winnipeg, and the former exchange in Toronto were structured as to avoid these by essentially forcing market participants to margin upfront.


I agree Desjardins and ABTB passes the duck test and neither are at all "wildcat" banks in the sense of old US state chartered banks in the days before national banking and deposit insurance in the US. My understanding is the provincial finance ministries and Ottawa cooridinate pretty closely on these institutions despite under the constitution the final legal responsibility is at the provincial level. Technically ABTB deposits are considered a full obligation of the AB government and no Federal or Quebec govt would ever allow Desjardins to fail and not payout to depositors despite technically not being a bank/CDIC institution(I believe during the financial crisis a standby agreement was put in place between and Ottawa and Quebec City allowing Desjardins to issue Federal govt guaranteed debt similar to what Ottawa was putting in place with the "Bank Act" banks if needed).

On the Casino front I am surpised no one has brought up changing the criminal code to allow single event sports betting. The Ontario casinos already have sportsbooks but you have to bet on multiple games at once leaving out the possibility for example of betting on the Superbowl.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad