Against the Gods. Bernstein Peter L.

the world would be a dull place if people lacked conceit and confidence in their own good fortune. Keynes had to admit that “If human nature felt no temptation to take a chance.. there might not be much investment merely as a result of cold calculation.”9 Nobody takes a risk in the expectation that it will fail. When the Soviets tried to administer uncertainty out of existence through government fiat and planning, they choked off social and economic progress.

      Gambling has held human beings in thrall for millennia. It has been engaged in everywhere, from the dregs of society to the most respectable circles.

      Pontius Pilate’s soldiers cast lots for Christ’s robe as He suffered on the cross. The Roman Emperor Marcus Aurelius was regularly accompanied by his personal croupier. The Earl of Sandwich invented the snack that bears his name so that he could avoid leaving the gaming table in order to eat. George Washington hosted games in his tent during the American Revolution.10 Gambling is synonymous with the Wild West. And “Luck Be a Lady Tonight” is one of the most memorable numbers in Guys and Dolls, a musical about a compulsive gambler and his floating crap game.

      The earliest-known form of gambling was a kind of dice game played with what was known as an astragalus, or knuckle-bone.11 This early ancestor of today’s dice was a squarish bone taken from the ankles of sheep or deer, solid and without marrow, and so hard as to be virtually indestructible. Astragali have surfaced in archeological digs in many parts of the world. Egyptian tomb paintings picture games played with astragali dating from 3500 BC, and Greek vases show young men tossing the bones into a circle. Although Egypt punished compulsive gamblers by forcing them to hone stones for the pyramids, excavations show that the pharaohs were not above using loaded dice in their own games. Craps, an American invention, derives from various dice games brought into Europe via the Crusades. Those games were generally referred to as “hazard,” from al zahr, the Arabic word for dice.12

      Card games developed in Asia from ancient forms of fortune-telling, but they did not become popular in Europe until the invention of printing. Cards originally were large and square, with no identifying figures or pips in the corners. Court cards were printed with only one head instead of double-headed, which meant that players often had to identify them from the feet – turning the cards around would reveal a holding of court cards. Square corners made cheating easy for players who could turn down a tiny part of the corner to identify cards in the deck later on. Double-headed court cards and cards with rounded corners came into use only in the nineteenth century.

      Like craps, poker is an American variation on an older form – the game is only about 150 years old. David Hayano has described poker as “Secret ploys, monumental deceptions, calculated strategies, and fervent beliefs [with] deep, invisible structures… A game to experience rather than to observe.”13 According to Hayano, about forty million Americans play poker regularly, all confident of their ability to outwit their opponents.

      The most addictive forms of gambling seem to be the pure games of chance played at the casinos that are now spreading like wildfire through once staid American communities. An article in The New York Times of September 25, 1995, datelined Davenport, Iowa, reports that gambling is the fastest-growing industry in the United States, “a $40 billion business that draws more customers than baseball parks or movie theaters.”14 The Times cites a University of Illinois professor who estimates that state governments pay three dollars in costs to social agencies and the criminal justice system for every dollar of revenue they take in from the casinos – a calculus that Adam Smith might have predicted.

      Iowa, for example, which did not even have a lottery until 1985, had ten big casinos by 1995, plus a horse track and a dog track with 24-hour slot machines. The article states that “nearly nine out of ten Iowans say they gamble,” with 5.4 % of them reporting that they have a gambling problem, up from 1.7 % five years earlier. This in a state where a Catholic priest went to jail in the 1970s on charges of running a bingo game. Al zahr in its purest form is apparently still with us.

      Games of chance must be distinguished from games in which skill makes a difference. The principles at work in roulette, dice, and slot machines are identical, but they explain only part of what is involved in poker, betting on the horses, and backgammon. With one group of games the outcome is determined by fate; with the other group, choice comes into play. The odds – the probability of winning – are all you need to know for betting in a game of chance, but you need far more information to predict who will win and who will lose when the outcome depends on skill as well as luck. There are cardplayers and racetrack bettors who are genuine professionals, but no one makes a successful profession out of shooting craps.

      Many observers consider the stock market itself little more than a gambling casino. Is winning in the stock market the result of skill combined with luck, or is it just the result of a lucky gamble? We shall return to this question in Chapter 12.

      Losing streaks and winning streaks occur frequently in games of chance, as they do in real life. Gamblers respond to these events in asymmetric fashion: they appeal to the law of averages to bring losing streaks to a speedy end. And they appeal to that same law of averages to suspend itself so that winning streaks will go on and on. The law of averages hears neither appeal. The last sequence of throws of the dice conveys absolutely no information about what the next throw will bring. Cards, coins, dice, and roulette wheels have no memory.

      Gamblers may think they are betting on red or seven or four-of-a-kind, but in reality they are betting on the dock. The loser wants a short run to look like a long run, so that the odds will prevail. The winner wants a long run to look like a short run, so that the odds will be suspended. Far away from the gaming tables, the managers of insurance companies conduct their affairs in the same fashion. They set their premiums to cover the losses they will sustain in the long run; but when earthquakes and fires and hurricanes all happen at about the same time, the short run can be very painful. Unlike gamblers, insurance companies carry capital and put aside reserves to tide them over during the inevitable sequences of short runs of bad luck.

      Time is the dominant factor in gambling. Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.

      Time matters most when decisions are irreversible. And yet many irreversible decisions must be made on the basis of incomplete information. Irreversibility dominates decisions ranging all the way from taking the subway instead of a taxi, to building an automobile factory in Brazil, to changing jobs, to declaring war.

      If we buy a stock today, we can always sell it tomorrow. But what do we do after the croupier at the roulette table cries, “No more bets!” or after a poker bet is doubled? There is no going back. Should we refrain from acting in the hope that the passage of time will make luck or the probabilities turn in our favor?

      Hamlet complained that too much hesitation in the face of uncertain outcomes is bad because “the native hue of resolution is sicklied o’er with the pale cast of thought.. and enterprises of great pith and moment.. lose the name of action.” Yet once we act, we forfeit the option of waiting until new information comes along. As a result, not-acting has value. The more uncertain the outcome, the greater may be the value of procrastination. Hamlet had it wrong: he who hesitates is halfway home.

      To explain the beginning of everything, Greek mythology drew on a giant game of craps to explain what modern scientists call the Big Bang. Three brothers rolled dice for the universe, with Zeus winning the heavens, Poseidon the seas, and Hades, the loser, going to hell as master of the underworld.

      Probability theory seems a subject made to order for the Greeks, given their zest

9

Ibid., p. 150.

10

This entire paragraph is from Bolen, 1976.

11

Excellent background on all this may be found in David, 1962, pp. 2–21.

12

See David, 1962, p. 34.

13

Hayano, 1982.

14

Johnson, 1995.