Posted by Dr Fro 8:55 AM
A little off-topic, but Jayson and I had a conversation a week ago that I thought I could elaborate on here. Many people have an immediate aversion to gambling. This is sometimes due to risk aversion. Some, however, are under the belief that all gambling carries a negative expected return. This is simply not true.

Almost all table games offer a negative expected return. We all know this, and this is the reason casinos stay in business. The sum of all parties' expected returns must net to $0, so if the house has a built in advantage, then you necessarily don't. In the long run, you can't expect to make money on craps, roulette, etc. To the best of my knowledge, there are only three forms of gambling where a player can expect a profit. This is not to say that all players can expect profit (remember: all expected returns must net to $0), but some may.

Poker
This is the easiest one to explain. First of all, there is no house take in a home game, so there are only two possible explanations of distributions of expected returns. Either a) everyone has a $0 expected return or b) some have positive and some have negative. I have actually met individuals that believe option A to be true. These people are mistaken. Once you recognise that individuals make decisions in poker and that some decisions are better than others, then it stands to reason that each time one player makes a sub optimal decision in the same situation that another player always makes the optimal decision, you now have one player with a positive expectation and one with a negative.

In card rooms, the house does have a take. As long as the positive expectation you have absent the house take exceeds the house take, you still have a positive expectation in card rooms. In other words, if you are good enough to win $40 per hour and the house charges $10 an hour, you still make $30 an hour. Of course the guy that expects to lose $40 per hour now expects to lose $50 an hour.

Blackjack
I think most people are familiar with the term "basic strategy." It is often represented in tabular format on little cards. Basically, for every combination of your hand and the dealers up card, there is one course of action that has the best expectation of all options. I don't remember the exact number, but I recall that even using basic strategy, you should expect to lose 0.5% of all money wagered. Negative expectation. Bad. However, if you are capable of counting cards, then you can flip that expectation into a positive. This is because you have greater information about the composition of the remaining cards. There are more card counting strategies out there than you can shake a stick at, and choosing from them basically involves a trade off between higher positive expected returns and complexity. I am quite good at math and memory, yet I cannot master even the simplest card-counting strategies. I would venture to guess that the overwhelming majority of people that claim they can count cards actually cannot. That leaves a small group out there that is making money playing blackjack. But they are there. Why does a casino offer a game where players may expect to win in the long run? Because the amount they lose to counters is immaterial to the heap of money they will take from the rest of us.

Sports
There is a misconception out there that all lines are set with some sort of omnipotent power such that it is impossible to win more than 50% of your bets. This is simply false. Lines are set by humans in anticipation of what other humans may bet such that 50% of the money is put on each side of the line. Thus, they are prone to inaccuracy. Lines move over the course of a week and this is evidence of the inaccuracy of which I write.

People will quickly believe that certain money managers are capable of beating the stock market, yet they scoff at the idea that an individual can beat the bookie. In finance, there is a "strong market theory"that basically asserts that stocks are priced perfectly such that nobody can expect to do any better in the stock market picking stocks than they could by throwing darts at the WSJ. I ask subscribers to this theory to explain to me the likes of Warren Buffet and Peter Lynch and watch them try to argue their way out of a paper bag.

Use similar logic as the home poker game argument I made above. If the net expected return of all punters (that' a good British word for gambler) is $0 (absent juice) then every time an idiot places a bet with a negative expected return, then the pro should have an equal and opposite return. Remember, the bookie does not care if the line is accurate he just wants your dollar and the idiots dollar on opposite sides of the line. So, say the omnipotent odds maker knows that the Horns should be favored over the Ags by 20. The idiot is willing to take the Ags at any line greater than 15. The savvy omnipotent pro of course is happy to take UT minutes 19 or more or the Ags plus 21 or more. Odds maker does not set the line at 20, or else he gets only the bet on A&M. He sets it at 18, gets money on both sides. Play the game 1,000,000 times and the savvy pro wins more often than the idiot.

But there is juice of 10% on winnings, so you must win 52.4% of the time to stay ahead. (That's +52.4 - 47.6*1.1 = 0.04, which is positive)

The sport betting of course includes horses, etc.

The most important difference between betting on a game versus the spin of a roulette wheel is that the outcome of the game is not a random event. The other difference is that not all punters have the same information. As with the stock market, the one with the best information and the best ability to draw conclusions from that information will come out ahead.

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