Gullibility and the gambler

Most casino aficionados have dreamt up, read or heard about, or (yes) spent money for systems or strategies to overcome the house edge. It's indeed doable, under very limited circumstances.

For instance, a "new" game might have a flaw in the rules or procedures, and hasn't racked up enough data for the condition to be spotted by the analysts. Alternately, a video poker or slot machine might provide high returns because of a mechanical glitch, a mathematical error, or a progressive jackpot that's gone over the top; if the anomalies are on multi-game devices, a players' advantage in one game could be temporarily missed by the bosses because it's masked by the house edge in the others. And, in blackjack, players may track cards used up and unavailable until the shoe is shuffled, then adjust their bets according to the edge implicit in the proportions of ranks left to be drawn.

The first two instances are rare. The third demands more skill, concentration, and practice than most bettors can or will exert.

So, why do many solid citizens risk their hard-earned dough on techniques that purport to defy what is, ultimately, simple math? Why, in the casino, does blind belief often outweigh skepti-cism?

Much the same questions are being asked about individuals and institutions who put staggering sums into a Ponzi scheme run by the respected Wall Street bigwig, Bernard Madoff. For those who aren't sure, a Ponzi scheme is a fraudulent investment vehicle whose payouts come from new shares being purchased, not from "the market." If the influx of fresh money is great enough, dividends and redemptions can be paid using what should be the fund's increasing capital rather than investment income. The trick is to finesse explanations of how profit is created.

Charles Ponzi claimed he bought postal coupons in one country and sold them in another, earning a net on exchange rate differences. The hoax, which he perpetrated mostly on illiterate immigrants, fell apart when newspapers reported that there weren't enough such coupons in existence to yield the returns being distributed. Owing to this disclosure, the public stopped buying shares, and when investors tried to pull out, no money was there to pay them.

Madoff's victims included financial professionals; prestigious banks, charities, and wealthy celebrities who employ top-notch money managers; and others who should have been sophisti-cated enough to smell a rat. Although the supposed strategy was fairly complex, like Ponzi's it chiefly involved buying in one market and selling in another. The fraud collapsed with the global economy. Redemption requests surged because large numbers of investors suddenly needed cash, and the well was dry.

Stephen Greenspan, a professor of psychiatry at the University of Colorado, examined the Madoff debacle in the January 5 2009 issue of The Wall Street Journal. He laid the blame on "gullibility." Among the factors he cited as inducing this mind-set were:

  1	Situations individuals don't understand but that seem to present low risk and are "too good to pass up," in part based on benefits other smart cookies seem to be deriving.
  2	Strong social pressures to get in on the act, backed by the illusion that participation is reserved for the chosen few.
  3	Promised gains, being modest but steady, seem conceivable and credible rather than dramatic and dubious.
  4	People may know certain facts intellectually but don't necessarily act on them rationally.
  5	Much of the public has a tendency to be trustful, especially of friends or acquaintances who seem knowledgeable.
  6	Everyone likes to protect or earn money.

One way or another, each of these may apply to faith in systems and strategies to beat the casinos. Do you recognize any in yourself? Incidentally, Professor Greenspan, the gullibility guru, admits he invested and lost a third of his retirement nest egg in a Madoff fund. Sounds like #4. The immortal muse, Sumner A Ingmark, put nothing with Mr Madoff. Of course, he had nothing to put. Still, he composed this clever couplet as a commentary.

A balance of trust and suspicion, May be the best gambling position.