Research, evaluation, analysis

Gambling and Investment

I noticed the other day that a television commercial promoting supposed winning strategies for slot machines is still running here in Toronto. That reinforced the point made in an earlier article about odds that many people could benefit from gambling education.

The only winning strategy I know of for slot machines is to own some. The success of slot machine players is completely random (in North America, anyway; I have seen slot machines in the United Kingdom which incorporate games of skill). I have read that slot machines are now programmed to return more money in early play, to encourage people to play longer, but basically every player who sits down at a slot machine has the same chance of winning as every other player, and that chance a poor one.

In games of chance like the lottery or slot machines or roulette, every player has the same chance of winning, and no opportunity to use skilful play to increase his or her chances of winning. There is a vast literature on this topic. People often think, for example, that they can beat games of chance by varying the size of their bets. They double their bets after a loss, or after a win, or use some other formula. Computer simulations have established that these strategies do not work.

If you cannot use skill, only blind luck will let you beat the house's edge. The edge is the difference between what the house takes in and what the house pays out. In a typical government lottery the prize money amounts to only 45% to 55% of ticket sales. That's a pretty hefty edge for the operator, and it means that the overwhelming majority of players must lose no matter how often or hard they try.

Other games allow you to use skill to improve your chances of winning, but the house does all it can to see that you can't use enough skill to make money in the long run. In blackjack, for example, a skilful player will do better than an incompetent one. However, casinos get upset if you display certain skills which might help you win consistently. For example, if you act as if you are keeping track of the cards still to be played, most casinos will remove you from the game (and the premises).

Another advantage for the house in blackjack is that you must play every hand. You are not allowed to pass if you have bad cards. In poker you can throw in a poor hand, but you still have to pay the ante.

Writers about horserace betting often contend that it is not a form of gambling but a form of investment. While horserace betting lacks the essential characteristic of investment – underlying value – it is more like investment than are slot machines or craps in that you are not required to make a bet. If the odds being offered in a race don't seem good enough, you just pass the race.

The types of activity normally considered to be investment all share this characteristic. You don't have to buy any stock you don't like, or make a deposit in an account which pays too little interest for your liking. Because of the large percentages taken out of the betting pools by the track and government before the winning bettors are paid, your chances of making dependable, large returns at the track are probably considerably less than they are on the stock market. On the other hand, the race track doesn't make you cope with phenomena like the average annual 5% loss in the actual value of the Dow Jones Industrial Average between 1965 and 1985.

As I have noted elsewhere and at every opportunity, I counsel no one either to gamble or to invest. Each is a form of risktaking in which success is not guaranteed even to the most skilful. However, if you are going to gamble, make sure you understand the type of game you are playing. If the game rewards skill, develop those skills before you start betting serious money. If the game doesn't reward skill, don't bet serious money.

And, of course, remember the two golden rules of gambling. First, don't bet money you can't afford to lose. Second, don't bet more money when you're losing. Those are pretty good rules for any type of investment.

Gambling and Investment © 2001, John FitzGerald
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