I was in Las Vegas yesterday, staying at the Bellagio. As I walked through the casino floor to get to the convention center, where I was delivering a presentation on valuation, there were three things that struck me about the setting:
1. The first is that there is no better example of the ruthless power of the law of large numbers and probabilities than a casino. Think about it. You have hundreds of slot machines programmed to deliver about 90 cents on the dollar, on an expected value basis. No surprise, then, that they do.... The house always wins (at least on the slot machines).
2. The second is that there is no worse setting for talking about risk, risk aversion and risk premiums than a casino. After all, any individual who would spend his money in a casino has accepted an investment with an expected return of about -10% and some risk, not exactly compatible with a risk averse, rational individual. I know, I know.. Gambling is not an investment but done for entertainment. I did not see much joy in the faces of the slot machine players as I walked by.. If they were being entertained, they did a good job hiding it.
3. The final point, though, came from a movie that I saw a few months ago called "21", about six MIT students who figured out a way to beat the odds at Vegas by counting cards. Even the most secure systems (and Vegas is as close as you can get to a slam dunk as you can get..) have their weaknesses.
The bottom line... If you play a game where the odds are against you, you are likely to lose and the longer you play, the greater the chance that the odds will catch up with you.
Good analogy, and I also find about 1% of the players are exuberant, may be due to their recent winnings (after streak of losses) or thru alcohol. I wonder whether most of the gamblers who play with lot at stake are also risk-lovers when it comes to investment? May be not. The casino gambling is always a zero sum game,if the gambler wins the house loses and the probablity are stacked so much against the gambler that he would eventually go bankrupt if he plays long enough. Same cannot be said for stocks, its not a zero sum game, more often than not it is a positive sum game if you go 'long' and play long enough. However, the derivatives market is more akin to casino gambling - there are gamblers (read speculators) who are trying to speculate but there are also investors who are trying to hedge. May be the recent years have seen speculators outnumbering the investors in the derivatives market or maybe there is a thinner line between speculators and investors than was previously thought.
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Thanks & Regards,
jai