Bob Dancer's LVA - 1 APR 2014
Risk Aversion for Gamblers
http://www.lasvegasadvisor.com/bob_dancer/2014/0401.cfm
*************************************************
This link is posted for informational purposes
and doesn't constitute an endorsement or approval
of the linked article's content by vpFREE. Any
discussion of the article must be done in
accordance with vpFREE's rules and policies.
*************************************************
Bob wrote: “Requiring a certain number of specific betting opportunities is only an important consideration if it really matters how well this particular gamble turns out. From a real-world standpoint, I don’t think this matters at all.”
From a tax standpoint it means everything, because you can’t carry forward (or back) gambling losses and expect it to hold up in an audit. If you can only do this once per year, if you win you pay taxes on an $1100 gain, which will likely wipe out your average gain of $50/year if you do it again next year and lose.
By the way, if you are observant, this kind of betting proposition shows up at tables games, sports bets, live poker, and certain casino promotions. Namely, the bet pays even money, 1-to-1, even pot odds, but you have an edge due to an observation you have made and your opponent has not. Now, a 5% edge might seem like a lot, but it’s not 100%, what I’m trying to say is it’s still gambling. The Kelly number would be about 20 and the N0 number would be about 400, meaning even if your bankroll is over 20 bets and you can pull this trick off 400 times before your opponent catches on, you still have about a 16% chance of coming out a loser. As Kenny Rogers put it, don’t count your winnings till the deal is done. Big EV is nice but it’s only one part of gambling, you still have to know the Kelly and N0 numbers.
Kelly is about variance/edge
N0 is variance/edge/edge
variance is 1 for even money bets
Why is Kelly important? How can I answer that question? Read Poundstone’s “Fortune’s Formula” to find out.
Why is N0 important? Because the tax man taxes on a yearly basis and doesn’t allow carry forward or backwards of gambling losses. You need to be able to run about N0 flips before the tax year is out or you’re likely to get screwed on taxes. You might find a hot play in December, but it won’t be a play till January if you consider taxes.
nightoftheiguana2000@yahoo.com wrote:
Why is Kelly important? How can I answer that question? Read Poundstone's "Fortune's Formula" to find out.
At your recommendation, I read this and I don't agree that it
clarified the importance of the Kelly Criterion. Thorp's competitors
who disagreed with him about the Kelly Criterion did not therefore
totally ignore the possibility of fluctuation destroying an otherwise
winning approach. Those who went bust may sometimes have done so
beause they overbet their bankroll, but, due to the less complete
information that a stock market player has than a blackjack or video
poker player, so could Thorp have. I believe that something like 98%
of Thorp's success was due to positive EV, not that he went by the
Kelly Criterion.
Take a look at the wizard’s page on the Kelly criterion and see if that convinces you:
http://wizardofodds.com/gambling/kelly-criterion/
If you really want to study the concept, there’s always: