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I believe that most of us will claim we understand mathematical probability, but I am not sure our actions support that conclusion. One look at Las Vegas, lotteries, and the entire immensely successful gambling industry points to a lack of understanding of mathematical probability. The futures industry likewise supports this conclusion. How many people buy scratch tickets? Play the lottery? Go to Las Vegas? Play the Dogs or Horses? Go to the Casino? Anyone that does those things really has little understanding of "mathematical probability"! Unless they were just playing for the "Fun" of it, and totally cognizant of the odds stacked against them, they would never participate. However, we all have a bit of dreaming and gambling in us, and those that profit in the gambling industry know this fact. It has been said that: “The LOTTERY was invented for those with very poor math skills” The truth of the matter is even if one is lucky enough to win that JACKPOT, the ultimate winner is always “The House”. Lets test your understanding of mathematical probability. Example If I have a coin and I give you the option of taking heads on every flip and I will take tails. 1. If I say to you I will give you $5.00 for every heads you roll, and you give me $2.00 for every tails you roll would you take the wager? 2. How long would you flip the quarter? If you answered “YES” for question (1), and for question (2) "AS LONG AS YOU WILL LET ME" then you have a grasp of the concept of "MATHEMATICAL PROBABILITY".Example 2 You go to Las Vegas and I provide you a guarantee that when you pull the slot machine lever that you will instantly win the $100,000.00 jackpot. However, I am willing to offer you an alternative to the jackpot you have just received. Instead of the Jackpot, I will be offering you all the profits that slot machine will generate before the next $100,000.00 jackpot is hit. Which choice will you make? If your answer is anything but the 2nd choice you have the wrong answer if you truly wish to make the best financial decision. It is highly probable that slot machine will generate many more dollars before giving up another jackpot. That is how slot machines work. Gaming Theory and Trading Gaming theory is the mathematical application of probability to games of chance. Some of the games of chance to which it can be applied include blackjack, roulette, craps, and poker. Casinos have created a statistical edge that skews the odds in their favor. The longer a gambler plays in the casino, the more bets they play. The more bets they play, the more likely the given edge will work in the casino’s favor. For example, the American roulette wheel consists of 38 slots – the numbers 1-36, 0, and 00. This is a 1 in 38 chance. However, the pay out for the bet is a fixed 35:1. This equates to a 5.26% edge for the casino. Probability is defined as the chance of succeeding divided by the total number of chances. When applied to a game where the pay out is not 1 to 1, the expected pay out needs to be multiplied by the probability: Expectation = [Number of the favorable results / Total number of the possible results] X The payoff for the favorable result + [Number of the unfavorable results / Total number of the possible results] X The bet Based on a $1 bet in roulette on 1 number, your expectation, in terms of dollars, is: Betting on 1 number = (1/38) x 35 + (37/38) x (-1) = -2/38 = -0.0526 or (-5.26%). The 5.26% edge is all that the casino needs to reap large profits. A similar statistical edge exists with some of the other games.
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