Good Gambling Decisions Require Logical Thinking

You may not realize it, but every day you make decisions that involve a gamble. You're late for work and you've just missed the left-hand turn arrow. Would it be faster to go straight and take the next main street, or should you just wait for the traffic light to cycle completely through? The correct decision depends upon a clear understanding of the variables involved.

That's how it works with gambling. You need to decipher the variables at hand, then make the most logical choice. In gambling as in life, clear logic is the key operative. Still, it's surprising how often logic eludes intelligent people's judgment when it comes to decisions involving money and chance.

I'm going to give some common examples of every day decisions that involve a gamble. Each one has a right and wrong decision based upon quantitative logic. Read them all before deciding how to handle each one.

• You've just bought a new refrigerator for $900. The warranty covers it for one year. You can opt for an extended warranty that covers the second year 100% for $50. The warranty company's actuaries determined that at a $50 rate, they could fix all the refrigerators that go bad in the second year and still have money left over. Your fridge is one of several thousand produced, but which one -- good or bad? You can comfortably afford to fix the fridge yourself if something goes wrong. What to do? Don't decide yet.

• Your home insurance premium has come due. It contains an option for a $100 deductible or a $500 deductible. The $100 deductible carries a $50 higher premium than the $500 deductible. If you go with the cheaper premium, you'll get stuck paying that extra $400 if a loss occurs that exceeds $500. The extra $50 for the lower deductible will allow the insurance company to cover the $400 should a loss occur and still make a tidy profit on your premiums over time. Also, you can well afford to pay a $400 loss yourself even if it should occur in the first year. What to do? Don't decide yet.

• At the beginning of the football season, you bet your brother-in-law $60 that the Chicago Bears wouldn't win five games an year. With one week left, they have four wins and are an 8-point underdog to Green Bay in the season closer. You're looking good, but will still lose if the Bears get lucky and win on Sunday. Your good buddy, Slick Vinny, offers to put up $80 to your $40 if you'll take the Bears to beat Green Bay outright. If you take Vinny up on his offer and "hedge" your first bet, you'll net a $20 profit no matter what the Bears do. Vinny gave you 2 to 1 odds because he knows that an 8-point underdog is a 3 to 1 long shot to win the game outright, giving him the edge on that proposition. If you took Vinny's bet four times, you'd come out $20 ahead every time. If you just let it go, you'd win $60 three times and lose $60 once for an average profit of $30 each. But which time is this? You'll have no problem paying your brother-in-law the $60 if the Bears do win. What to do? Now it's time to decide.

The first thing you should notice is that every decision to take the safe way out worsens your average result. It's true that each decision is a separate entity with a "one time only" result. But they all contain the same elements and their results will combine into the same pocket--yours! Think about that.

Furthermore, in the future you will be faced with many other decisions carrying these same elements, even though they will involve totally unrelated scenarios. The three key elements are:

1. Every one of these "safety valves" taken separately is a bad bet.
2. You can afford to absorb the cost in stride if you gamble and lose.
3. If you just gamble in every case, you'll be ahead on all of them combined.

This doesn't mean you shouldn't insure yourself against financial disaster. Indeed you should. That's why you have liability coverage on your car and fire insurance on your home. Those are two bets you can't afford not to make. You're forced to pay the "vig" that's built into the insurance companies' premiums and protect yourself against being destroyed. But the protection described above is, by definition, "small potatoes" and merely provides peace of mind more than anything else. The problem is, you'd be paying more for it than it is worth. Its sellers would only be making money off of you. The logic here is really quite simple: if you can afford to absorb these potential losses, you're better off paying for each one yourself as they occur. Once you understand that, your peace of mind will come from knowing that you'll be ahead in the long run.

Oh, by the way. It works exactly the same way with your natural blackjack against the dealer's Ace up!

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