Why the British prefer gambling to investing

Financial advisers will tell you the first week of April is the most important week of the year for making investment decisions. The end of the tax year is the deadline for using your annual Isa allowances. But for many of us, the second week of April is the bigger event, since this is when we make our annual pilgrimage to the bookies to bet on the Grand National. I've only won once in 30-odd years, when Seagram came good for me at 8-1 in 1990. But if I had put as much effort into managing my finances as I do poring over the form guides and planning my strategy for this one bet each year, I could have bought my own racehorse by now.

Some people complain Britain is gambling crazy. Last year, we spent £250m betting on the Grand National. Much of that money will have been from people like me, enjoying the annual ritual. But the Grand National is the tip of a very large iceberg. In 2006, Britons wagered an estimated £50bn on various forms of gambling, including betting on everything from sports to politics to the National Lottery, via bookies, spread-betting companies and betting exchanges. Nationally, the UK gambling "pot" is growing about 4% a year and that's without a single super-casino.

But those who regard the gambling boom as a terrible indictment of modern Britain a symbol of moral decline and essential frivolousness are missing an important point. Why do people bet so heavily on the Grand National?

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It's because the odds are so generous. The winner's odds are typically at least 10-1. What other investment offers you a chance to make ten times your money in an afternoon? In competitive societies where income inequalities are large, gambling fulfils a vital social function. Gambling offers the lucky few the chance to accumulate some capital and thus a way out of poverty. The middle classes may sneer as they invest in funds forecast to grow by 6% a year, but those who start out with nothing have nothing to lose by taking risks. They certainly won't get rich banking their 6% a year. They need capital growth, not income.

I don't think it is any coincidence that the current boom has coincided with a dire period for the stock market. The FTSE 100 has risen less than 50% over the past ten years, making it by far the world's worst-performing major stockmarket. The S&P 500 is up nearly 100%, while the German and French markets have more than doubled. The FTSE 100 now lags on around 14 times earnings, well behind New York, which trades on 18 times. That makes British companies more vulnerable to foreign takeovers. This at a time when Britain is one of the best-performing economies in Europe, and the City has eclipsed New York as the world's top financial centre.

Why have UK stocks underperformed so spectacularly? Explanations include Gordon Brown's tax raid in 1997; the fashion in the pensions industry for switching out of stocks and into bonds; and the increasing weighting in the UK indices of banks, which are more lowly rated than other companies. But the growth of gambling has also been a factor, since it has robbed the market of vital retail investors. For all London's financial heritage, retail participation in the UK market is among the lowest of any major market and far below the US, where everyone seems to have a portfolio.

So the real issue is why British punters prefer to gamble at the bookies, rather than the stockmarket. Tax may be a factor, since winnings are treated more favourably than trading profits. The lack of financial literacy may be another. There may also be cultural reasons: the US has a long history of fortunes won and lost on the stockmarket. Through the 19th century opening up of the West, via technology-led booms in the 1920s, 1960s and 1980s, the US has had a steady supply of high-risk, but potentially fast-growing companies stockmarket equivalents of Norton's Coin, the 100-1 shot that won the Cheltenham Gold Cup in 1990. But where are Britain's Googles?

Sadly, British corporate and financial life has fallen victim to the same safety-first, risk-averse culture that has infected every other sphere of national life. The big institutions dominating the UK market are only too happy to accept steady returns of 6% a year and corporate bosses are happy to oblige, keeping their companies conservatively financed and avoiding big acquisitions. But that's no use to your average punter, who wants juicier odds.

What can be done to change this? It may be changing already, as companies come under pressure from private equity and hedge funds to embrace risk. But they are up against the combined might of the consumer protection lobby and a Government that has a profound distrust of the

City and seems to regard risk as a dirty word. That's sad for London. Critics rail against "casino capitalism". But the truth is that so long as

Britain lacks a casino culture, the FTSE will continue to underperform and people will continue to bet on horses as will I. After all, I must be due another win.

Simon Nixon is executive editor of Breakingviews.com.