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Game Theory: A Regulator, a Mathematician, and a Psychologist Walk Into a Casino...


Some notes from the 15th International Conference on Gaming and Risk Taking, now on in Las Vegas -- where else?

With the Internet gamblers, we have thousands of binary bets over periods from five minutes to a few days. We know they're trying to win money, nothing else, with no relevant constraints or costs. We have complete data on every trade, and every potential trade. For most of them, the gambling is tax-free -- either by law, or because they are ignoring the law.

However, the most interesting finding to me (so far, anyway; there's a lot of analysis left to do with these data) is the losing bettors. As is usually the case, we find that people bet more when they are wrong than when they are right. This is the basic insight that gave birth to the field of financial risk management. When people decide how much to risk by judgment, even the most experienced risk-takers generally do a worse than random job. That is, they would be better off risking the same amount each time than varying bet amounts by how good a gamble they think something is. This has been documented in just about every kind of risk-taking. A risk manager at a minimum can keep the bet sizes even, and with some work, can reverse the process so the more the risk-taker wants to bet, the less he or she is allowed to bet. The final goal is to come to an understanding of what the edge is, so the risk-taker can bet the optimal amount each time.

What impressed me is that the losing bettors - the large majority, of course - are not betting randomly. If they were, they would lose the house edge (about 3%, depending on the bet). In fact, they lose more than the house edge, because they bet more when they're wrong than when they are right. So in some sense, they know to make money; they just act in the opposite way. My co-authors and I were able to show that if you could intercept the bets and change the amounts -- or in some cases, the direction -- based on the previous records of the bettor, you could make money from everyone's bets, even after paying the house edge. It's easy with winners, of course; you could pass the bets through unchanged. With the biggest losers, you can just reverse the bet. But you can do much better than those simple rules.

I have another paper, a solo effort, on the history and future of research on financial bubbles. There are a lot of other great presentations (or at least ones that look great based on the presenter and the abstract). I expect to meet some old and new friends, some of whom seem to live permanently undercover, as if part of a self-developed witness protection program.

There are also a lot of changes going on in the gambling industry and some fascinating developments in the neuropsychology of gambling. It will be strange to have a conference without Bill Eadington, one of the few people respected by all subcultures of gambling researchers, but things change and life goes on.

These days, I have a great time in Las Vegas. Mostly things away from the Strip like the Gamblers Book Club and some of the genuine Old West stuff and some of the genuine new ethnic stuff; but also some of the touristy stuff on Las Vegas Boulevard. For most of my life until 2000 or so, I avoided Las Vegas unless I needed to go there for a big poker game. I never liked casinos, and casinos didn't care for poker players. But both Las Vegas and I have changed, and we now fit together pretty well, at least for visits.

I'll do a post or two on some of the more interesting presentations I see, and maybe inspire a few of you to attend the 16th International Conference.
No positions in stocks mentioned.
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