Risk is an unavoidable feature of life, so in a sense all of us are all the time gambling. For instance, we are placing a bet when we invest money in a new business venture. Many business ventures don’t succeed. Why then do we do it? Most of the time, it’s because we think we’ve got some edge that will increase our chances of success.
But do we really have an edge? Maybe your life’s dream has been to open a barbecue restaurant. You’ve been cooking barbecue for your family and friends for years, and they tell you it’s the best they’ve had. Your brisket has won first prize at the state barbecue cook-off two years running. So you decide to take the plunge and open a barbecue restaurant.
Was it a wise move? Maybe your barbecue really is that good. But maybe you’re not the best businessperson. Maybe the people you hire to serve the food misapportion it so that customers feel cheated. Maybe the people helping you in the kitchen allow the brisket to dry out in the crockpot, dissatisfying customers. Maybe the location you chose was bad. Most restaurant businesses fold quickly.
Okay, so what about betting on a sure thing? With many business ventures there are so many intangibles that it’s hard to assess the risk-reward ratio. But there are exceptions. The insurance business, for instance, provides very steady returns. Take car insurance. For any policy holders, there will be clear probabilities of accidents and expected payouts. Provided that the insurance companies charge enough to cover their expected payouts, they’ll be fine.
Most of the time when we think about gambling, however, we don’t think about investing in a business or even about investing in stocks or bonds. We think about shooting craps of spinning a roulette wheel at a casino. With such games of chance, the probabilities of winning and losing can be precisely determined. And almost invariably, the odds favor the casino.
Almost invariably, but not invariably. There is one exception, namely, card counting at blackjack. Casinos watch for this and quickly expel players whom they suspect of card counting. But if the card counter is subtle enough, he or she may be able to fool the casino and make some cash. Even here there are risks, and the card counter needs some cash reserves because the advantage isn’t large–just a few percentage points in favor of the card counter.
For all other games, the odds favor the casino. So what do you do then? If you’re trying actually to make some money or keep what you have, the best advice is not to gamble at all in such situations. When you’ve got a losing game–that is, one in which expected payoff is less than the expected loss–don’t play it.
But suppose the sheer enjoyment of sitting at the gaming table and placing bets is too much for you. You are going to gamble and you’re going to do it at a losing game. You recognize that you’re more likely to end up a loser than a winner. But still, you want to cut your losses as much as possible. In that case, the best advice is to play boldly.
“Bold play” here has a precise technical meaning. It means to venture everything at once rather than to allow it to dwindle away gradually by repeated small bets. It is a fact of probability theory that in the long run what is likely to happen will inevitably happen (professional probabilists refer to this as “the law of large numbers”). By betting small amounts repeatedly, you are that much more likely to guarantee a loss than you would by making only one or a few bets.
What’s the conclusion? It’s best not to gamble at all on a losing game. Nonetheless, if you are determined to gamble on a losing game, bet your wad quickly rather than dribble by dribble. Like a leaky bucket, the dribble-by-dribble approach guarantees you’ll lose everything, given enough time. Betting it boldly, in one big wad, is risky, but at least gives you a fighting chance of making some money.
Will this advice be followed? Unlikely. People don’t go to a casino to make one or a few big bets and then leave. They enjoy sitting at the gaming table for long hours, making bet after bet. The pleasure centers in our brain work that way–they hate big losses and derive pleasure from little wins. So what’s the point of this little article? That when you lose your money, you’ll understand why.