Saturday, January 19, 2008

Statistics and Probabilities Can Be One's Friend

Today, I took a break from personal finance and visited a casino to play craps. The reason I like craps is that the probability of losing can be minimized with a strategy of playing only a few types of bets. Since I play for entertainment once every couple years, I like to play for a while with a small stake.

In craps, the bets with the best odds are the line bets (pass and don't pass or come and don't come) with odds and the place bets for 6 and 8. The pass and come line bets have a house edge of 1.41% which can be reduced to .6% with 2X odds bets. The don't pass and don't come bets have a house edge of 1.36% and can be reduced to .46% with 2X odds bets. The place bets for 6 and 8 have a 1.52% house edge. Of course, there are a multitude of exotic and exciting bets that can be placed in craps. However, the house edge will range from 1.67% to 11.11%, indicating that players are more likely to lose on these bets over the long term.

My personal preference is to play the line bets of don't pass or don't come with about a .5X odds on the 10 and 4 points, primarily, and on the 5 and 9 points, secondarily. I will typically pick up my don't pass/come bet on a 6 or 8 point. Occasionally, I will make a place bet on the 6 or 8. In the three years that I have used this strategy, I typically have been able to make a $100 stake last about 2 to 4 hours. Usually, I end up close to even, which I consider excellent since I consider gambling entertainment. Even when I break even, I can be up or down $50 to $60 during the session. However, at the lows I still continue my playing strategy, because I know it's the best probability for me to minimize my losses.

So what does craps have to do with personal finance? After playing today, I couldn't help thinking about an analogy with investing in the stock market. The investor's edge for the S&P index has been about 10% from 1926 to 2006. With this high an edge, it makes sense to be placing bets consistently with the S&P index, even with the 9.8% decline in early January, 2008. Using a strategy that is validated by the statistics and probabilities will eventually pay out. This is about as close to a "guaranteed" high return as one can get. The challenge, for me, is to avoid the multitude of exotic and exciting alternative stock purchases that are available to me, which are likely to reduce my investment edge.

Of course, past performance is no guarantee of future results. However, at this time, I am still willing to bet on the probability that future returns will be in line with history:-)

For more on Reflections and Musings , check back every Saturday for a new segment.

Photo Credit: morgueFile.com, Michael Connors

This is not financial or investment advice. Please consult a professional advisor.
Copyright © 2008 Achievement Catalyst, LLC

1 comment:

Lazy Man and Money said...

I love to do pass and come bets. I like to be on a variety of numbers and enjoy the hedge that the come bet gets me. Unfortunately, I don't win big, but I don't lose big either.