Sunday, April 4, 2010

Blackjack, following the numbers, and figuring out how to do it

I spent this weekend in Bettendorf, Iowa (the Quad Cities area) at the Isle of Capri hotel with my girlfriend and her family. We played some blackjack, which got me thinking about a great topic for my MBA student blog. Blackjack is a pretty easy game to try to get your cards to add to 21, and you play against a dealer. There are plenty of complications which I won't get into here. My main focus, however, is the idea that there is a play that statistically is correct for a situation. This idea is based on a topic familiar to MBA finance students, expected value. You look at the amount you would win or lose per hand over lots of simulations. If you do something that on average will earn you $1 per occurrence, and you do it 1000 times, you will end up with somewhere around $1000 dollars.

In every casino game, the house arranges the payouts so you have anegative expected value. However, in blackjack, you can minimize their edge, or get a slight edge yourself, by making optimal plays. But how is one person supposed to run so many simulations to determine the correct play? At the Kelley School of Business, you learn how to do this through Excel applications from Palisade Software, specifically @Risk, and Wayne Winston's K507, K508, and K509 classes. I am in the process of integrating Chris Albright's Visual Basic Programming for Excel class and creating a blackjack simulator that will let you select options and play out situations thousands of times. Who knows, maybe I'll make enough money so that I don't need to use my MBA finance major! Just kidding...gambling shouldn't be anything more than a entertainment hobby.

One last do some people win lots of money gambling, and others lose plenty? Why doesn't everyone lose a little? The answer is the best or worst factor about probability...variance. The variance in one hand of blackjack is can win your bet, lose your bet, tie (a push, you get your money back), or get blackjack and win 1.5 times your bet. Just like 10 flips of a coin doesn't come out 5 heads/5 tails, variance causes some bettors to win in situations where they would be expected to lose, and vice versa. In gambling parlance, trusting the odds and not getting rattled by losses is called "fading". I guess the lesson is, unexpected things always happen, so try to fade it in your life, gambling or not.

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