The title may suggest I’m talking about the gambling proclivities of investment banks, but actually I’m talking about the way the high street banks treat their customers.
Many years ago I got fascinated by the fact that my mother seemed to be able to spend many hours playing blackjack in casinos, and not lose anything. I calculated the expected returns on a blackjack hand played with optimal strategy (but without counting cards). It turned out that the expected returns on a $100 blackjack hand are something like -$0.04. That means that if you play 1000 hands, your chances of coming out ahead are about 49.4%. Ridiculously close. Furthermore, that is the result of all kinds of extra options that are given to the player, like splitting cards, which each allow the player to move the odds ever so slightly in their favour — but obviously, they’ve been precisely calculated to make sure the odds of winning don’t go over 50%, since that’s a tipping point for the casino. But it’s so close to even that she could play 1000 hands at $10 each, and lose only $4 on average, much less than the value of the free meals and other inducements offered by the casinos.
So why do they do it? Why do they give the players all these extra tools, like splitting cards, to shave fractions of a percent off the house advantage? I realised that it’s a matter of giving players enough rope to hang themselves with. Most of these extras are almost never beneficial to the player. Most players will use them incorrectly, thus increasing their losses while simultaneously acquiring a satisfying sense of control over their fate. Continue reading “Banks and casinos”
The 13th century University Church of St. Mary is an important Oxford landmark. It was the first building of the university, and stands as an imposing symbol of traditional Anglicanism on the High Street. And now, apparently, it is funded by the proceeds of gambling.
I’ve long been fascinated by the gradual moral detoxification of gambling, something that I discussed at some length in my review of The Quants. Christians have vacillated between viewing gambling as a heinous sin and as a good way to fund their churches. Not unlike their earlier views of loans at interest and capitalism more generally.
It’s particularly striking to see a church displaying the symbol of the cross in the sacrilegious form of the gambler’s crossed fingers. I wonder how Christians react to the symbol. It seems like a gestural swear word, as though a priest began his sermon with “God almighty, it sure is hot this week. What are we doing in church, for Christ’s sake?”
I’ve commented on the peculiar dissipation in recent times of the moral stench of gambling, particularly as practiced by the quant elite, who seem at times to revel in their role as gamblers. But I discover now that I was preceded by more than 3 centuries by Daniel Defoe, in his brilliant Essay on Projects:
Wagering, as now practised by politics and contracts, is become a branch of assurances; it was before more properly a part of gaming, and as it deserved, had but a very low esteem; but shifting sides, and the war providing proper subjects, as the contingencies of sieges, battles, treaties, and campaigns, it increased to an extraordinary reputation, and offices were erected on purpose which managed it to a strange degree and with great advantage, especially to the office-keepers; so that, as has been computed, there was not less gaged on one side and other, upon the second siege of Limerick, than two hundred thousand pounds.
This last extraordinary remark, that people were wagering vast sums on the outcomes of sieges. (£200 thousand in the 1690s is probably like £20 million today, or $30 million.) And he goes on to use gambling on the outcomes of siege warfare to present a fascinating example of a sort of arbitrage called a “dutch book”: Combining different wagers with different parties so as to obtain a cumulative certain profit. (De Finetti’s “Dutch Book Theorem”, stating that you need to calculate with something indistinguishable from the standard rules of probability if you don’t want to fall victim to someone else’s dutch book, is the basis of certain approaches to the foundations of probability.) Continue reading “Gambling and finance: The 17th century view”