What kind of gambler are you?
Disciplined or reckless?
Are you impulsive, or even compulsive?
Cautious? Smart, or stupid?
Are you contrary – you like to bet on things that most people think will ‘never happen’? Or do you prefer to follow a crowd?
Do you get the concept of ‘value investing’? Or do you believe everything in gambling is ultimately down to luck?
Here are a couple of scenarios that can help you define what kind of gambler you are….
Do you have a pro gambler’s instincts?
Take this hypothetical situation….
A man offers you the one-off chance to bet on the toss of a coin at odds of 100/1. You can bet as much or as little as you like, and pick Heads or Tails.
For our purposes here we’re going to say that you can be 100% certain that the offer is genuine, and that you’re not being scammed. The coin is not weighted in any way. It will be a fair flip and you can be 100% certain that you will be paid your winnings if you win.
You only get one go at it; 1 single flip of a coin. You can call as the coin is in the air if you want. You can bet as much money as you can ante-up, or as little as €1.
You have to pay up immediately if you lose. If you win you’ll be paid your winnings straight away.
You have up to a week to make up your mind, and to get your stake money together.
How much do you bet?
This isn’t a question with a right or wrong answer. And everyone’s financial situation is different.
A very rich person could bet a huge amount and the outcome wouldn’t actually materially impact their life greatly either way. But a poorer person could bet a relatively modest amount, and the difference between Heads or Tails could be life-changing for them.
So let’s give you a specific scenario; a pair of shoes to stand yourself in.
You are 40 years old, and the main bread-winner in your family. You have two kids. Your spouse (also 40) works part-time, and would like to retire at 50.
You’ve been in the same job for 10 years, a job you enjoy, and you can see yourself staying there until you retire. Your dream is to retire at 55. Your annual salary is €50k.
You have €60k in your pension, which you can withdraw as cash if you want at any time with no notice.
Your house is worth €400k and you still owe €200k on it. You can release all of the equity as cash if you want, and stay in the house.
There is €10k in your current account, and €15k in a savings account.
You have a mate who will lend you up to €100k interest free, to be paid back over 10 years.
Your kids go to state schools, but you would like to send them to private schools. But you’ve worked out that there’s no way you and your partner can retire by 55 as well as paying school fees.
At the moment you are on course to be able to retire at 55. The equity in your home and the pension will let you enjoy a good, comfortable retirement, including many years before you’re (what you call) ‘properly old’.
You are a reasonably materialistic person. You would love a sports car, a fancy watch, a bigger house and a holiday home in Portugal.
You’re not really a gambler. You bet on a few football matches every year, and have been to the casino a few times – but you don’t consider yourself a ‘gambling person’.
When you meet the man offering the 100/1 coin flip you’ve got €100 in your wallet.
How much do you bet? At one end of the scale you can bet nothing at all.
The very maximum you can bet is; €385,100. Made up of;
€100, in your pocket.
€10,000, from you current account.
€15,000, from the savings account.
€60,000, from your pension.
€100,000, borrowed from your mate.
€200,000, equity from your home.
What do you risk given that scenario?
There isn’t a right or wrong answer, but it’s a good way to measure your appetite for risk. But it’s also about your ability to weigh ‘risk and reward’ – which is, ultimately, what any form of investing/gambling/betting comes down to.
Let’s look a quick look at four characters faced with this scenario; the thought processes they go through, and the decisions they make;
His first thought is that there’s a very good chance that he’ll lose. In fact he knows there’s exactly a 50% chance that he’ll lose, whatever call he makes and however much money he risks.
It doesn’t matter to him what the upside is if he wins, it doesn’t change the fact that the chance of him winning the bet is no more than 1 in 2. So he keeps his money in his pocket and doesn’t bet anything. It’s not worth the risk. He’s not a gambler. [Cautious: Careful to avoid potential problems or dangers.]
He bets the lot. All €380k. Once in a lifetime opportunities only come around – well, once in a lifetime. You can’t let these things pass you by. Here is a genuinely unique chance the become a multi millionaire – to be able to afford to do all the things he dreamed about doing, while he is still young enough to enjoy them.
€380k x 100 = €38million. That is a seriously life-changing amount of money. It secures the future of his family, and sets his kids up for life. This is a chance here, a very good chance, of becoming seriously rich – and enjoying all the benefits that come with it.
The downside is pretty bad, but it’s not disastrous. Nobody is going to die. Life goes on. Bottom line is that winners don’t let this sort of an amazing chance slip through their fingers. [Reckless: Acting without thinking or caring about the consequences of an action.]
This guy takes €5k from his bank account, €10k from his savings, €25k from his pension, and €60k from the equity in his house – and bets €100k. He keeps the €100 in his pocket, so he can go and get drunk if he loses.
He knows his numbers, understands odds and probability. He recognizes this is an investment opportunity that is never going to come up again. A €100k bet gives him €10million if he guesses right. That’s enough to retire with tomorrow. There’s nothing that he wouldn’t be able to buy or do with €10m, that he would be able to if he had €30m. So it’s not worth emptying all his accounts, taking all his equity or borrowing in order to bet.
Betting all his savings and rainy-day money would be irresponsible in his position. If he was young and single, then maybe. But with a family to think about, he’s looking for a balance between making the most of the opportunity, and limiting the downside if he calls Heads and it comes down Tails.
If that happens, for sure he might need to work for a few more years than he planned, and they might not be quite so comfortable in retirement. But he’ll be able to live with his decision, and know it was the right thing to do whichever way the coin falls. [Invest: Devote time/effort/energy to an undertaking with the expectation of a a worthwhile result.]
He just bets the €100 in his pocket. €10,000 would a lovely sum of money to suddenly fall into your lap. €100 isn’t so much to lose that you’ll lose any sleep. He’s not greedy.
It’s a great opportunity of course, so it doesn’t feel right to bet nothing. But it’s also not worth the risk of impacting on the life that you have planned out for yourself in order to chase a big pile of cash. Having lots of money might not make you any happier anyway!
And the other benefit is that it gets it over and done with quickly. You can flip the coin right there and then. It removes the temptation to start emptying bank accounts, and to get too stressed over working out how much to bet. Just empty your wallet, flip the coin and what will be will be. [Prudent: Acting with or showing care and thought for the future.]
Which character are you closest to? How much do you bet?
It’s a hypothetical situation, and what you ‘say’ you would do is probably not what you would ‘actually’ do if the scenario played out in real life.
But if your answer is something between €10k and €100k then you probably have the right sort of ‘heart’ to be a professional gambler. A lot less than that and you are under-estimating the scale of how good the opportunity is. A lot more and the scales are tipping towards the ‘risk’ away from ‘reward’. There are probably sharply diminishing real-life returns once you get over betting €10k to win €1m.
If you bet €100k then that is a bold, smart but gutsy call. Regardless of the theoretical value in the bet, it still takes a bit of guts to bet €100k on the flip of coin.
The chance to get 100/1 about a 1/1 shot is the kind of dream scenario that a professional investor knows is probably a once-in-a-lifetime thing. Mr Cautious couldn’t live with himself if he bet and he lost. A pro gambler would kick himself forever if he didn’t have a proper bet at odds like this, regardless of the outcome.
Do you have a pro gambler’s head?
Imagine now that the same man is giving you a different proposition.
Again you know with 100% certainty that it’s genuine, there is no scam or underhand tactics involved.
This time you are invited to play a ‘three cup game’. There are three cups; 1 blue, 1 green and 1 yellow on a table, and one plastic ball.
With dizzying hand speed he moves the cups and ball around the table until his hands come to rest, and you have to guess under which cup the ball lies.
You try to follow the ball a couple of times, but it’s impossible – he’s just too fast.
The he says that this time you’re going to play for real. He’s going to move the cups and the ball, and if you guess right he’s going to give you €1,000. There’s no catch, and no stake to put down. It’s a no lose situation – but the upside is you could win a grand.
He starts to move the cups and the ball around, and you make a decision – you close your eyes. There’s no way of following the ball, because it moves too fast. So you figure there’s no point in even trying. You shut your eyes tight, and don’t open them again until the man says that he’s ready for you to make your choice.
You know there’s no logical way to choose between them, there’s no edge to be found here. So you go for your favourite colour which is blue.
But he doesn’t turn the blue cup over immediately. He turns over the green one. And there’s nothing under it.
There’s just the two cups left now – blue and yellow. The man tells you that he is giving you a chance to change your mind. You can pick blue or yellow. This is the one that counts. If you pick right and the ball is under your cup, you win the money.
What do you do? Stick with blue, or switch to yellow?
There are three possible answers;
A, Stick with Blue. B, Switch to Yellow. C, It doesn’t matter either way.
Most people reading this will probably say C. It doesn’t matter.
Next, a fair number of people would say A. Stick with Red. It’s 50:50 anyway and you’d be gutted if you deserted your initial instinct and it cost you a grand!
But they’d all be wrong.
The correct answer is that in this scenario is that you should change and go for the yellow cup.
At the start of the game there was a 33.33% chance that you would guess right, whichever cup you chose.
And there was therefore a 66.67% chance that the ball lay under one of the other 2 cups – green and yellow. With the green cup removed, there is a 66.67% chance that the ball is under the yellow cup. And still a 33.3% chance that it’s under blue. So you should switch to yellow. It doubles your chances.
Didn’t get that right first time? Don’t worry, not many people do.
“Follow you heart. But take your brain with you”. Alfred Adler.
A version of this article originally appeared on Odds-Invest.com. I write betting related articles for them in addition to my day job there.