Unfortunately, I haven’t been able to write as often as I’d like. But you have to consider the concept of opportunity cost. With work and school, and a number of other events this summer, I just can’t afford to write often. Anyway, as we’ve reached the halfway point of this summer, I have a strong feeling that my hectic schedule will relax and my time will be freed. Free at last! Free at last! The sweltering summer of [my] legitimate discontent will not pass until there is an invigorating autumn of freedom and equality. (What’s that from?) Okay, I’ll stop.
So, I’m planning on making a trip to AC in a couple weeks with some friends. I just learned that one of my peers at Drexel won 6 G’s on the Roulette table this past weekend. And I wonder, how often does that really happen? From a probability standpoint, I’m often surprised at how much the odds are favored against us. A casino is a business, and just like any business, they will ensure that they make money off of every single game they have to offer, over the long run. Expected Value (EV) is a term used often in probability, describing the weighted average of a given process. Basically, it’s what any player can expect to win (or more likely lose) if they play a given game over and over. And the EV for every game in a casino is, that’s right, negative.
The same concept of EV applies to many entities. Take insurance companies for example. Using the concept of EV, buying insurance is difficult to justify, as is gambling. That’s because EV for buyers of insurance is negative.
For that small chance that something happens to you, you will get money from your insurance company. If nothing happens to you, no money. Just like your favorite casino game?
Because you are even given the initial chance to receive money for something happening, you must bet some money, called your premium. You do not get refunded this bet or premium if you do not have a claim. Same goes for casino bets.
Considering the significant amount of people who pay for insurance, the companies make much more from premiums than they pay out for claims. Even individually, the odds are against your favor; it is extremely difficult to buy into a policy that allows you a positive expected value.
The interesting thing is that the expected value of playing Roulette is higher than buying insurance. Roulette has an EV of about -5% of the amount bet, while Health Insurance has an EV of about -10% of the amount bet, or premium.
So why do we buy insurance? We buy insurance to be prudent, to avoid that major accident or ailment that could bury us in debt. Not having insurance has a higher risk than having insurance. On the other hand, playing Roulette is riskier than not playing. You assume risk by playing, whereas an insurance company assumes risk for you when you buy insurance. That’s why we buy insurance. Plus, insurance uses pooled money, and thus spreads the risk you take.
Now I do not by any means condone NOT gambling. Obviously, all else is not equal when considering a game at a casino. There are many, many factors, but EV is just one major factor to consider. All I’m saying is don’t be frustrated when you walk out of the casino with no money to get home. It’s supposed to happen that way buddy.
Anyways, I hope to be in AC in a few weeks, and I hope to prove the theory of Expected Value wrong!