Americans spent $58 billion dollars on lottery tickets in 2011 in hopes of defying the odds and striking it rich.  The tremendous popularity of the lottery despite it’s horrific return on investment has led some to cynically label the lottery as a stupidity tax.  However, a group of MIT students figured out how to turn the lottery from a losing proposition into a lucrative enterprise.  They recognized that about every 3 months when the Massachusetts Cash WinFall  jackpot reached roughly $2 million, the payoffs for smaller prizes would significantly increase if there was no winner.  Like a card counter waiting for the odds to swing into the player’s favor, the lottery group would wait until the jackpot reached a level high enough to produce an advantageous investment opportunity.  By purchasing $100,000 worth of tickets, they virtually guaranteed they would win. The MIT lottery syndicate purchased over $40 million in tickets from 2005 to 2011, winning approximately $48 million.

Lottery officials learned about the profitable loophole but didn’t take action because the professional gamblers generated millions in revenue for the lottery.  After the the loophole became public in 2011, lottery officials enforced a $5,00o limit on the amount of the tickets that retailers could sell per day. Earlier this year the Cash WinFall game was stopped. More details here…..

]]> http://mikeaponte.com/gaming/the-mit-lottery-team/feed/ 0 http://mikeaponte.com/card-counting/the-truth-about-continuous-shuffle-machines-card-counting/ http://mikeaponte.com/card-counting/the-truth-about-continuous-shuffle-machines-card-counting/#comments Fri, 31 Aug 2012 23:06:52 +0000 Mike Aponte http://mikeaponte.com/?p=4569

I get asked fairly often about continuous shuffle machines (CSM’s) and their effect on the game of blackjack. With CSM’s, no discard tray is needed because the dealer continuously places the played cards into the shuffle machine (for example, after a player busts a hand). This provides a constant randomization of the cards which negates the benefit of card counting. Fortunately, at the vast of majority of blackjack tables you will not find CSM’s. The casinos that do employ CSM’s, use them only at a select number of tables – usually low minimum tables. What saves card counters from the prospect of casinos using CSM’s at all their blackjack tables is the superstitious and unknowledgeable nature of gamblers. Many blackjack players refuse to play at tables with CSM’s, especially the bigger bettors. They don’t trust CSM’s because they believe that CSM’s rig the game or increase the casinos’ advantage. The reality is that the average blackjack player does have cause to worry about CSM’s but not for the reason they believe. CSM’s do not increase the house edge. In fact, if you play perfect basic strategy CSM’s actually lower the house advantage by a tiny bit. Where CSM’s really hurt the average gambler is that they allow the house to deal more hands per hour because there is less downtime. Since the dealer never has to shuffle the cards, more hands are dealt per hour which means blackjack players bet more often and of course lose more money.  It is ronic that the typical blackjack player who lacks the knowledge & skill to beat the house is unknowingly helping card counters by preventing the spread of CSM’s.

I was invited to speak at Def Con about a different kind of hacking – my experience with the MIT Blackjack Team. After a showing of the movie 21, I spoke about how our team exploited an inherent vulnerability in the game of blackjack – it’s dependent event nature.  The expertise of hackers is exploiting vulnerabilities & weaknesses in computer systems.  The parallels were very evident to the audience.  They also appreciated the underdog aspect of how a bunch of college kids took on the “Man” and won.  The energy and camaraderie at DefCon reminded me of my college days as well as my card counting experiences.  During the course of my talk and Q & A session  I received  a number of rousing ovations. Def Con has a strong spirit of sharing, learning and fun.  During  the convention many presentations were made on a wide range of hacking subject matter, such as breaking wireless encryption keys and finding back doors to hardware. There were also contests such as Capture The Flag, a competition in which teams of hackers must both attack and defend identically configured servers. While I was at Def Con I was interviewed by The Verge, a technology focused publication.  Among the topics discussed was the similarities between the culture of hackers and the culture of advantage players.  Video of the interview to come. In the meantime, you can check out a Card Counting 101 tutorial that I provided for the Verge. You can also view the video in my video gallery.

Last week I met with Michael Covel, author and president of Trend Following, a privately owned firm specializing in trend trading research.  Michael recorded our lunch meeting as he interviewed me about my experiences with the MIT Blackjack Team. We were both struck by the similarities and connections between trend trading and card counting. Expected return, risk management and a systematic approach are just some of the strong commonalities. Michael was kind enough to give me a copy of his documentary, Broke, along with several of his books. Since our meeting I have read The Complete Turtle Trader: How 23 Novice Investors Became Overnight Millionaires.  It was a fascinating read and I hope to interview Michael myself to learn more about trend trading and how investors can best navigate the often treacherous waters of financial markets. More to come on trend trading as well as the amazing story of the Turtle Traders. Below is a link to the interview, part of Michael’s podcast.

http://trendfollowing.libsyn.com/webpage/mike-aponte-interview-trend-following-manifesto-with-michael-covel

A proud moment – meeting Ed Thorp (right)

Even in such an accomplished group, Thorp was the star of the evening, and he showed himself to be every bit as gracious as he is brilliant.  After delivering a short speech, Thorp received a rousing standing ovation. It was truly an honor for me and everyone in attendance to meet the man that made it all possible.

The mean or the average of the count in blackjack is zero as there are an equal number of low cards and high cards in any shoe or complete number of decks.  The further away the count is from zero, the stronger the tendency that it will move back toward the mean.  Professional card counters gain an advantage by wagering larger bets during positive deviations in the count when there is a greater probability that favorable high cards will be dealt as the count returns to its center of zero.

In the financial world, conventional wisdom is to buy when a  stock is undervalued and to sell when the price is  high. The law of regression to the mean states that probability wise, extreme values are more likely to be followed by less extreme values. Reversion trading is based on buying or selling stocks that are out of line with their “normal” pricing. Traders profit when  market prices return to their average just as card counters do when positive counts move back to the mean count of zero.

Although reversion trading is based on mathematical law, there’s no guarantee that this approach will yield a profit. The million dollar question is what is the true mean of a stock or commodity?  Variables used to forecast the market such as P/E ratios, interest rates, and investor confidence, just to name a few, are constantly changing.   In addition to the ever changing nature of market variables, another challenge is determining the appropriate time horizon for the mean price. Many traders have learned the hard way that  models that were successful in the past may no longer produce a profit, or may have been an aberration that was the beneficiary of chance.

In the game of 21 as well as the financial markets, it is possible to forecast the future and capitalize on deviations from the mean if the key variables are captured and weighed properly and the true mean  and its corresponding time horizon are determined.  As compared to the financial world, blackjack offers a static predictive measure (the count), as well as an explicit mean and time horizon. Unlike a stock or commodity, in 21, what goes up truly must come down.  This makes the return on investment in blackjack unmatched by that of any trading model in the financial world.

On a riverboat casino I once witnessed a 21 year old kid parlay a $25 buy-in into $1000 in less than an hour.  As his chip pile grew so did his grin, and he insisted on high fiving me repeatedly.  I was happy for him but I was hoping he would take his money and run.   Instead, he tried to ride his luck even further – even increasing his wagers to $200, $300 a hand. He was playing with “house money” and he figured he had nothing to lose. However he did have something to lose and unfortunately the story had an all too familiar ending.  He hit a bad run and gone was his $1000 grin.

This is a common phenomenon among gamblers.  When they’re lucky enough to be up on a casino, rather than quitting while they’re ahead or  keeping the size of their wagers at a modest level, they become loose in their play and they take on even more risk.  There’s a disconnect between the perceived value of their gambling winnings and their actual value.  But $1000 is a $1000, regardless of whether it’s casino chips or a paycheck.

In behavioral economics, the tendency to value some dollars less than others is called “mental accounting”. This concept was developed by Professor Richard Thaler of the University of Chicago.  People tend to place gambling winnings in the category of “bonus” or “found” money.  People are  more likely to waste their tax refund or gift money as opposed to income earned on the job.

What contributes to gamblers placing less value on house money is the use of casinos chips.  The value of casino chips are cheapened in much the same way that credit card dollars are because there is seemingly no immediate loss of money. For some, credit cards and casino chips are like monopoly money.  Shoppers are much more likely to spend beyond their budgets on credit card purchases as compared to cash purchases.  When buyers  fork over cash, the value of of their hard earned money hits home.  In casinos it’s easier for gamblers to risk hundreds, even thousands of dollars when they’re pushing out chips instead of cash.

So the next time you’re fortunate enough to be winning at the blackjack tables, or receive a tax refund or bonus check, be sure to  keep your mental accounting in proper perspective.  If you don’t, it can be very detrimental to your financial well being.

In the movie 21, Professor Mickey Rosa poses an interesting puzzle to his class – The Monty Hall Problem.  Imagine you’re on a game show and the host presents to you three doors.  Behind two of the doors are goats.  Behind one of the doors is a car. Choose the correct door and you win the car.  Let’s say you choose Door #1.  The host, who knows what’s behind all the doors, opens  Door #3  and reveals a goat.  The host then offers you the choice of staying with Door #1  or switching to Door #2.   Should you switch doors at this point?  To answer this question you must first determine the probability of choosing the car and the probability of choosing a goat.

At first blush it may seem that it’s basically a coin flip.  After all there are two doors left, one of which will reveal the car.   Either door would be a 50/50 proposition, right?  Well,  as counter intuitive as it may seem, if you switch doors  you would  double your odds of winning.  Many people emphatically believe  that after Door #3  is eliminated, the odds of wining and losing are equal.    This would be true if there were only 2 doors to choose from at the start of the game.  But, the game began with three doors which means that when you selected Door #1, you had a 1 in 3  chance of winning the car and a 2 in 3  chance of getting a goat.  If you stick with your original pick of Door #1, those odds of winning and losing remain the same.

However, if you choose to switch doors, your odds of winning increase dramatically.  The key to this problem is that the host knows where the car is and will only open a losing door.  If you switch doors, you will win if the car is behind Door #2 or Door #3 because the host will always open a door that has a goat behind it.  You essentially have two shots at winning.   By switching, you  would only lose if the car happens to be behind Door #1.

In summary, if you stay with Door #1  you have a straight 1 out 3  chance of winning the car and a 2 out 3  chance of claiming a goat.  If you switch doors you will win if the car is behind Door #2 (1/3)  or Door #3  (1/3).  Adding these two probabilities yields a 2/3 chance of winning and a 1/3 chance of losing.  The Monty Hall Problem illustrates an important principle of card counting.   Card counters use information gained from the cards as they are dealt to update the constantly changing odds of the game.  In order to earn a long term profit, a good card counter must capitalize on this  by betting proportionally larger amounts relative to player advantage – in the same way Ben Campbell correctly chose to switch doors after determining that it would increase his odds of winning.

This system may seem like a fool proof way to beat the house.  After all,  the odds of losing 7 or 8 hands in a row are slim.  As long as you finish a session after a winning hand,  you will walk away a winner.  But,  all progression bettors learn the hard way that  sooner or later you will get wiped out.  Eventually  you will lose 7, 8, even 10 or more consecutive hands and your session will end with a devastating loss.   When a progression runs into an  inevitable unlucky streak, the result is  financial ruin.   For example, if a Martingale bettor with a $10 base unit  loses 10 straight hands, he would  drop $10,230.  When you’re doubling your bet everytime you lose,  it doesn’t long for a small base bet to become a huge bet you can’t afford to lose. If you play long enough, at some point you will be hit with a painful  losing streak.  I know this all too well, having once lost  14  straight hands in Atlantic City.  If I had been utilizing a betting progression, the result would have been disastrous.

Betting progressions could work in a hypothetical world.   If you had an infinite bankroll and played at a casino which offered an  infinite table maximum, you would be able to whether the storm of any losing streak,  without fear of going broke or being constrained by a table max.  In  the real world however, gamblers play with a limited bankroll and table max’s are far from infinite.  House edge is what rules.  Simply stated – whoever has the advantage will come out on top. All casino games have a built-in edge for the house which is immune to betting progressions.   Due to their simplicity and often positive, short term results, betting progressions may be appealing to unsuspecting gamblers, but unlike card counting and other forms of advantage play, they do not hold up to the unforgiving laws of probability.