Tuesday, April 2, 2013

Trying to Beat a Casino

Yesterday’s post was an April Fools' joke. However, the simulation results for the casino dice game of craps were real. As commenter Patrick figured out, the catch was that the strategy called for betting negative amounts.

The “system” starts out with $100 bets and goes up by a dollar after a win and down by a dollar after a loss. However, we will lose slightly more often than win. So, the bet amount will keep going down until it hits zero and then become negative.

Of course, casinos won’t allow gamblers to bet negative amounts. This is effectively like reversing the role between casino and gambler. It’s no wonder that a gambler who uses the system starts out losing while the bets are positive and ends up winning after the bets become negative. The only way I know to beat a casino at craps is to get them to gamble at your craps table.

This kind of hidden problem with experiments and simulations doesn’t just appear in cooked-up April Fools' jokes. A study by Schleef and Eisinger on asset allocation schemes concluded that investors should increase their stock allocations over time. However, this conclusion was just an artifact of a problem with how their simulations sampled historical returns. Poorly constructed studies can produce all kinds of crazy results.

3 comments:

  1. Hi Mike,

    I know this does not relate to your post...

    However, please let me know your thoughts on the recent CBC discussion on uninsured investments (ETFs, Mutual Funds, etc..).

    They stated that the Govt. or Bank (e.g Cyprus) can come in and take away a certain percentage of the investement and we cannot do a darned thing about it.

    Any ideas or thoughts on this? Are you thinking of ways you can protect your money from them?

    Thanks for your advice/thoughts...

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    Replies
    1. @Anonymous: Powerful people and organizations like governments can do a lot of things. To protect yourself, you have to be able to anticipate the actions of these powerful organizations. I don't have any useful insight into this. I'm currently going on the assumption that this will not happen in North America, but who knows what will happen if debts spiral out of control.

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    2. There is always the possibility of the government deciding to seize your assets, whether they're insured or not, in a bank or real.

      There's a slightly higher chance of loss with more "virtual" assets and those that can be divided for tax (e.g., the income trust Halloween massacre). But the government could decide to appropriate your house (or eliminate your principal residence capital gains exemption), or tax your assets instead of just your income.

      But in general, they don't -- that's not what good governance is about. Of course, if the hole is big enough they may not have a choice, which gets into a moral lesson about not choosing "bread and circus" leaders.

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