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Best of Donald Catlin

Gaming Guru

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Money Management

1 October 2005

Whenever I see the term "Money Management" a red flag goes off in my head. Although some writers using the term do have sound advice on handling a gambling stake, many others that use the term just have harebrained suggestions of betting in patterns that presumably can make one a sure winner at a negative game. The latter is pure nonsense. In this article I hope to give you some sound advice on money matters.

First of all you should have a separate account for gambling money. Frank Scoblete likes to refer to this as his 401G (since I am a retired professor mine is a 403G). There are two very good reasons for doing this. First of all, you should not gamble with money that is dedicated for another purpose. Now although I have a real libertine streak in me, I feel that gambling with money that you need for other things is just plain immoral.

The second reason is that you shouldn't play with scared money. What do I mean by that? Let me give you an example. Suppose that you are playing Blackjack and you get a pair of threes versus the dealer's four. The correct play is to split. It's not a great play but it is the correct play. Then you get another three. Okay, split again. You get a ten on the first three and an eight on the second three; you double the second hand and get a five. Phooey! The third three get hit with a five and then a ten; not a great hand. If you're playing quarters you now have $100 riding on the outcome. The dealer gets a seven and then a ten for twenty one and you lose $100.

Now let's suppose that a few hands later you get dealt a pair of twos and the dealer shows a five up. You correctly split. Then you get dealt another two. You think back to those threes and decide to just hit the four total. Error! You're playing with scared money. You luck out and draw a seven. You think about those threes again and that $100 loss. So you don't double. Error! You're playing with scared money and as a result you are not playing optimally.

My next tip is to play for a fixed gain and fixed loss at each session, for example, risking $100 to make $100. Now before you turn up your nose and declare that I am the one giving out harebrained suggestions, hear me out. I do not, repeat, do not think that doing this will change the long run edge of any game. In fact, it will not change it one iota. So why bother? Well, it does change some short-run effects. For one thing it changes the casino from essentially an infinitely rich adversary to one with finite resources. So what? This reduces the ruin probability for that session; you have a better chance of leaving the table with a profit, although in a negative game you're still more likely to lose than win (positive games are a bit trickier - see my article on Kelly betting in the archives). If you just keep playing with no end in sight, you are a sure loser and that is a mathematical fact.

I recall having dinner with Anthony Curtis and discussing this and he remarked that the only thing that quitting while you're ahead accomplishes is that sometimes you get to walk around with the casino's money in your pocket; your average loss in the long run will be unchanged. Of course he was absolutely right. But hey, you come to a casino to enjoy yourself and if sometimes having their money in your pocket is a good feeling, great!

Actually, there is another benefit to playing this way. If you lose your stake for that session you will get up and leave - your fixed loss has been realized and the game is over for now. In other words, you don't chase your losses. Chasing losses is a good way to gamble over your head.

Finally, if you are disciplined enough to leave the casino with a win under your belt, you can deposit your gains in your 401G and earn interest on it until the next time you play. Even if it's only a few bucks, it is a profit. In fact, I prefer to open a line of casino credit so that the only time my money leaves my 403G is when I lose.

My last suggestion is probably the most important one. Don't use credit cards. There are two ways this can occur. One, of course, is on-line gambling which, despite its popularity, I don't endorse. The other is using the credit card machines that are in every casino. You insert your card, enter your PIN, and the money shows up at the casino cage. Of course you get charged for the transfer so you have already lost some of your stake before you even start to play. But that is not the worst of it. If you rack up a large balance gambling, one that you cannot afford to pay, you are going to end up paying dearly and for a long time. This brings me to credit cards in general. They can be a dangerous phenomenon, and in my opinion their misuse is encouraged by the American banking industry. Let me show you why they can be so dangerous.

I have a credit card (that I pay off each month) and it has the following terms. The annual percentage rate is 18%. The minimum payment is the greater of $15 or 2% of the unpaid balance. Let us suppose that I make a $2000 loan with this card. Further suppose that I never add another penny to the balance and simply pay it off using the minimum monthly payment. How much money do you think I pay back to the credit card company and how long do you think it will take me to reduce my balance to zero? The answer is that I will return $6174.60 to them and it will take me 23 years and 2 months to do that. Those are not misprints. With this example in mind, suppose that I do use my card every month to make purchases (as do most of us) and that I always pay the minimum allowed. In this case I will be in debt to this company for the rest of my life and, once my card is maxed out, I will be using money I would like to have for other things to pay this usury loan. Not a pretty picture is it?

See you next month.

Donald Catlin

Don Catlin is a retired professor of mathematics and statistics from the University of Massachusetts. His original research area was in Stochastic Estimation applied to submarine navigation problems but has spent the last several years doing gaming analysis for gaming developers and writing about gaming. He is the author of The Lottery Book, The Truth Behind the Numbers published by Bonus books.

Books by Donald Catlin:

Lottery Book: The Truth Behind the Numbers
Donald Catlin
Don Catlin is a retired professor of mathematics and statistics from the University of Massachusetts. His original research area was in Stochastic Estimation applied to submarine navigation problems but has spent the last several years doing gaming analysis for gaming developers and writing about gaming. He is the author of The Lottery Book, The Truth Behind the Numbers published by Bonus books.

Books by Donald Catlin:

Lottery Book: The Truth Behind the Numbers