Posts Tagged ‘fair bets’

Expected value is a concept that allows us to factor in the probability of an uncertain event into our calculations. Imagine that you have a summer roofing job in Sandy, Oregon. I chose Sandy because it gets 182 precipitation days per year so on any given day there is a 50% chance of not working due to the weather. If you get paid $80 per day worked and $20 when you do not work due to rain, what should you expect to make in a twelve-week summer? Let’s break this down into a smaller problem.

The expected value of any given workday is the average of the payment received for working ($80) and not working ($20), which is $50. This is because there is an equal chance of either type of day occurring. By extension, the expected value of a five-day work week is $250 and of total summer income is $3,000.

What does this have to do with betting? A fair bet has an expected value of zero. For example, a bet of $10 on a coin flip is fair. There is an equal chance of losing or gaining $10. The average of these two values (+10 and -10) is zero. Casinos make their money by offering unfair bets. The expected value of (almost) every casino bet is negative (and none of them are positive). They cannot collect a guaranteed profit from a fair game so they count on you to play a rigged one. What do you suspect about the expected value of casino profits?