A couple of weeks ago, I had a conversation with my teenage son, who is taking AP Economics and learning about the stock market. We were talking about one of his investment choices. He had invested some money in Call Options for Ford. He paid $30 per contract and within a few days, they were worth $70-plus.
I suggested that he sell the options and quickly pocket the $80. His response was that he thought it was going higher and that he was willing to risk the $60.
My response was that he was now risking $140-plus and not just the original $60. Anybody out there get a sense that the same conversation could happen at a blackjack table?
How many of us have sat down at a table, starting with $100. You have a hot streak to start our session and quickly we realize we have $150 to $250 in front of you. You get a little greedy and want more.
At the same time, you convince yourself that you were always prepared to lose your original $100 if it came to that. But, if eventually you get wiped out, did you really only lose the original $100 or did you lose the $150 to $250 that you had at one point?
From a mathematical perspective, this is not an easy question to really answer. If your bankroll peaks at $250 and then you lose $20, did you win $130 or lose $20? I think most of us would agree you won $130. If, on the other hand, your bankroll peaks at $250 and you leave the table with $60, did you lose $40 or $190? Mathematically, you lost $40. Emotionally, you might feel like you lost $190.
So, while from a math perspective, we probably look at only the net loss or net win as your loss or gain, sometimes the emotional part can be just as important. Imagine that you play for hours starting with $200. You spend most of the time having lost money, but you get on a hot streak at the end and manage to walk away with $180. You lost $20, but you’re almost relieved.
Now imagine that at one point your bankroll is up to $500. The cards go cold for the final 20 minutes and you wind up with $220. You walk a winner, but I’m guessing you won’t feel like one. If you had only quit 20 minutes earlier, you’d have won $300!
So, I’m going to do something I rarely do and throw the math book out the proverbial window. I’m a believer that once the money comes over to your side of the table, it belongs fully to you. Sometimes, people like to joke that they are playing with the casino’s money when they are up. This is really a defense mechanism, preparing the player so that if/when they lose the money back that they didn’t really lose.
In similar fashion, once you make a wager that money belongs to the casino, even while you’re not sure if you will win or lose. This is why when I analyze a game, I consider a ‘push’ as if the player ‘won’ the original wager back. This is a subtle difference in how some others have calculated paybacks where they count pushes as non-events. In most games, this won’t matter, but in games where pushes are frequent, like blackjack, this may affect the reported payback.
So far, my son has experienced a true Las Vegas experience with his investment. Ford stock has taken a sharp downturn and the options are now worth less than he paid. The similarities end there, however, as the rules in the casino are not quite identical to those of the stock market.
Ford releases its earnings this week and my son fully believes the stock will recover as a result. Thus, in his mind, he is not playing a negative payback game like blackjack and he feels it was worth the risk, even if it doesn’t work out in the end.
In the casino, we have the payback to tell us what WILL happen. The longer you play a negative payback game, the more likely you are to lose. Thus, it becomes even more important to be careful even when “playing with the casino’s money.”
You can try out your strategy by playing our video poker game.
Question? Comment? E-mail me at: Elliot Frome