The House Advantage: Playing the Odds to Win Big In Businessby Jeffrey Ma
As part of the notorious MIT Team depicted in Ben Mezrich's now classic Bringing Down the House, Jeff Ma used math and statistics to master the game of blackjack and reap handsome rewards at casinos. Years later, Ma has inspired not only a bestselling novel and hit movie, but has also started three different companies--the latest of which, Citizen Sports, is/i>… See more details below
As part of the notorious MIT Team depicted in Ben Mezrich's now classic Bringing Down the House, Jeff Ma used math and statistics to master the game of blackjack and reap handsome rewards at casinos. Years later, Ma has inspired not only a bestselling novel and hit movie, but has also started three different companies--the latest of which, Citizen Sports, is an innovative marriage of sports, betting, and digital technology--and launched a successful corporate speaking career. The House Advantage reveals Ma's cutting-edge mathematical insights into the world of statistics and makes them applicable to a wide business audience. He argues that numbers are the key to analyzing nearly everything in the world of business, from how to spot and profit from global market inefficiencies to having multiple backup plans in anticipation of every probability. Ma's stories and business lessons are as intriguing as they are universally applicable.
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The House Advantage
Playing The Odds To Win Big In Business
By Jeffrey Ma
Palgrave MacmillanCopyright © 2012 Jeffrey Ma
All rights reserved.
THE RELIGION OF STATISTICS
WE ALL HAVE a defining moment in our lives—a moment that is a leap from hesitation to action, a single decision that sets us on a completely new course. My moment came at a blackjack table in Caesars Palace casino in Las Vegas.
I was 22 years old and a professional card counter. I had recently graduated from the Massachusetts Institute of Technology (MIT) with a bachelor of science in mechanical engineering, but I was using almost none of that formal education in my daily life. Instead, I was using math and statistics to beat the game of blackjack. I had perfected some straightforward formulas and simple equations that told me how much money to bet on each hand, and if I followed these equations correctly, I won.
The night of my defining moment, I walked up to the table and was passed information by my MIT teammate via a secret code. My teammate had been keeping track of the cards that had been played at the table and by saying the code word aloud was transferring that knowledge to me.
Using this information and the equations, I knew I should bet two hands of $10,000 each. I sat down and put ten yellow $1,000 chips in each betting circle, looking up at the dealer to signify that I was ready.
The dealer seemed none too concerned with my large bets. She dealt me an 11 on one hand and a pair of 9s on the other, and then dealt herself a 6 up. Blackjack is a game of pure math, and to that end the decision of whether to hit (take one more card), stand (take no more cards), double (double my bet and receive only one more card), or surrender (give up on the hand, losing half of my bet) left no room for improvisation. My decision was based on something elementary to all card counters called "basic strategy."
Basic strategy is a set of rules for optimal play in blackjack. Displayed in matrix format, it tells the player, based on his cards and the dealer's up card, exactly what action should be taken. It changes slightly based on the rules at the table, but as long as you are familiar with these rules and have them memorized, basic strategy reduces the casino edge to less than 1 percent. It was developed in 1957 by four army technicians who used approximations of mathematical algorithms and then ran calculations on a desktop calculator to determine probabilities of all possible combinations of hands.
In my moment, the dealer had a 6 up; basic strategy told me I should double my first hand, the 11, putting another $10,000 down and receiving only one more card. I stacked ten more yellow chips and placed them next to the original ones, signifying my double down. The dealer dealt me a 7, giving me a total of 18 on my first hand. Typically, 18 is a losing hand. But, when the dealer has a 6 up (as she did then), an 18 still stands a reasonable chance to win.
The next hand was a pair of 9s. I split—putting another $10,000 down, I would be able to play each 9 separately. On the first 9, I received a 2, making the total sum of that hand 11. At this point, the dealer gave me the option to "double down" again and, following the rules of basic strategy, I did so. I reached into my pocket for ten more of my rapidly dwindling yellow chips and stacked them prettily in line next to the four stacks of chips already on the table.
And then, a whirlwind. The dealer gave me a 5 on that 11 to make a total of 16 and then moved on to my final 9. She dealt me a 10 on this 9 to give me a total of 19 on that hand. I now had $50,000 on the table and had a 19, a 16, and an 18 against the dealer's 6 up. Even for a practiced card counter like me, this was a stressful situation.
In blackjack the goal is simple: Aim for 21 without going over. In a casino, you play only against the dealer. The others at your table—their games, their stories, their skill or luck or genius—do not matter. My only nemesis that night, then, was the dealer and the house that stood behind her. She flipped her hole card (the card that lay face down throughout play) and revealed a 5. This simple flip gave her a very dangerous starting total of 11. Because her total was less than 17, she was forced by rule to take cards until she reached 17 or greater. That night, she needed only one card. Sure enough she dealt herself a 10, for an unbeatable total of 21. I lost every last hand and all $50,000.
A woman behind me shrieked, "My lord! That is my entire mortgage!" I stared hard at the table. I was a trained card counter using math to beat blackjack, and I had learned not to react. I made a new calculation with the information from the cards that had been played on the previous hand and deduced that my bet should now be three hands of $10,000. A devoted believer in our model and method, I put down my three stacks of ten yellow chips without hesitation. On the first hand I received a 9 (a 5 and 4), a 19 on the second, and a soft 15 (an ace and a 4) on the third. The dealer had a 5 up. Because my next move was dictated by math and there was really no "choice" for me, I doubled on the 9, putting another $10,000 down and received a king for a relatively strong 19. I stood on the next hand, the 19, and then doubled on the soft 15, receiving a 4. I had a total of 19 on that hand.
I stacked a total of $50,000 worth of chips onto the table. Out $50,000 from the last round, this was my chance to either win back all the money or wind up down $100,000. I'd only been playing for about five minutes. I felt sick to my stomach and wondered how I, with my very conservative upbringing, had come to this point. But this was blackjack, I reminded myself. There is barely time for cogent calculation and planning, let alone time for nostalgic reflection.
There were only two out of thirteen cards that would beat me outright, a 5 or a 6. Furthermore, the information gleaned from my card counting would lead me to believe that there weren't many of those cards left in the deck. The dealer paused for a second and then flipped her next card, revealing a 6—one of those two evil cards. Again, she had a total of 21.
I lost all three hands and, with them, another $50,000.
As part of the MIT Blackjack team—a group of MIT students who had learned and perfected the science of card counting—I used math and statistics to beat the casinos legally. We were some of the most successful card counters in the world, and we believed in what we were doing because it always worked. Yet here I was, faced with a serious test of my faith.
It may sound dramatic, but for us, belief in the power of analytics and statistics was not unlike believing in God. Truly religious people of all denominations and creeds may be tested along the way, but they always believe. My faith, as it were, in the religion of statistics was being mightily tested in that moment.
I trudged upstairs to my room at Caesars and collapsed on the floor, staring up at the ceiling and reviewing the events of the past ten minutes. Where had I gone wrong? I replayed the hands and the decisions again and again in my mind. They were all consistent with the basic strategy, and yet I had lost. How could this be? Maybe the math wasn't right. Maybe it didn't work after all.
Doubt crept into my head as I continued to be haunted by the possibility of this unprecedented moment of loss. In my year as a card counter, I had surely lost before but never to this extent—comparatively, this loss was catastrophic.
I believe we are all faced with these moments of doubt. How we choose to deal with them is telling. In my case, I had nothing left to lean on but my faith in math and statistics. I knew it worked. It wasn't as if the fundamentals of blackjack had suddenly changed in the middle of those hands. The method that we developed was surely still sound regardless of what had happened at that table.
I pulled some spreadsheets and a calculator from my suitcase and ran through the numbers. I soon realized that on the first of those hands I had roughly a 5 percent advantage over the casino and, on the second, roughly a 6 percent advantage. Both were huge advantages for the game of blackjack, but neither represented the proverbial "sure thing."
To boil it down further, in the first hand I had only a 52.5 percent chance of winning. The casino would still win 47.5 percent of the time. Obviously, at different points of the hand I thought my odds of winning were significantly higher in light of the cards I saw on the table, but when I put my money into the betting circle, my advantage was still only 5 percent and 6 percent.
Doing the math helped me put the night's events into perspective. I had to choose between two alternatives: to quit or to continue playing. I told myself that to give up here would be to give up on everything that I had worked for in all the nights spent dealing cards to myself and practicing with my teammates. I couldn't quit. It was not a viable alternative.
So I made the decision to go back down to the casino and begin to play. I played for the entire weekend, winning back the $100,000 I had lost and then some. I won a total of $70,000 net. If I had won those first two hands I would have won over $250,000 for the weekend. But my faith in our system got me out of my $100,000 hole and then some.
I had become a true believer in the religion of statistics.
In 2001, I approached Ben Mezrich, an author, about an idea for his next book. I told him about my group of friends and how we used math and statistics to beat the casinos—for millions of dollars. We traveled on weekends from Boston to Las Vegas and were members of an elite team of blackjack players. Most of us were current students or recent graduates from MIT, one of the premier universities in the world. But while our classmates had knowledge as their reward, we had cash and chips—lots of cash and chips.
Ben was reluctant. Back in 2001, there was no poker on television and fewer casinos worldwide, and when people thought about counting cards, they had visions of Dustin Hoffman from Rain Man. They certainly didn't think of it as a riveting James Bond–like tale of whiz kids taking down the evil casinos. A book about card counters from MIT sounded more like a cure for insomnia than a New York Times bestseller.
But after seeing a full-blown demonstration of our "talents" in Vegas, Ben was on board, and the book Bringing Down the House was born. It represents "my story," or at least Ben's version of it. Because I wasn't sure how people would react to a book about gambling, I asked Ben to change my name. "Kevin Lewis" and "Ben Campbell" (as the main character was named in the movie version, 21) became my alter egos, and my story was immortalized in what became a New York Times bestselling novel and a blockbuster movie. In both, my experiences were the centerpiece of entertaining and dramatic twists on our travails, but the piece that was not dealt with fully was the innovation, ingenuity, and business acumen required to beat the casinos, information I believed could be valuable to a wide array of business scenarios.
I took these lessons with me into my post-blackjack life, looking for opportunities to apply them outside of the casinos. There were some obvious choices. Of course, finance called me early on in my professional career, but it only held my interest for a short time. The industry I eventually turned to was sports. A tremendous passion point for me since childhood, sports represented the opportunity to continue my journey using math and statistics to create competitive advantage.
I started a company called PROTRADE with some incredibly smart people from the sports industry, and we were able to get an investment from Kevin Compton, one of the most successful venture capitalists in Silicon Valley (he's also the owner of the San Jose Sharks, a team in the National Hockey League), and Jeff Moorad, who at the time was one of the top sports agents (he is currently the owner of the San Diego Padres). With my business partner, Mike Kerns, our goal was to revolutionize sports via technology and analytics. We began working with professional sports teams like the San Francisco 49ers and the Portland Trail Blazers. We helped them use statistics to make better decisions both on and off the field. Also, we worked with traditional media giants like ESPN and Sports Illustrated to enhance their content offering with advanced statistics. I launched a career speaking to corporations about how to apply the lessons of blackjack and sports to their industries. The notoriety I had gained had given me a platform from which to preach the religion of statistics to all who would listen. And as I tried to spread the message, I came across other like-minded followers who taught me important commandments necessary to gain the House Advantage.
If I'm known as the Bishop of the Blackjack Diocese, my friend Bob Stoll takes pastoral care of sports gambling. Over the last ten years, he has fostered the same belief system around betting on football and basketball that I had for blackjack.
With the rise of Internet gambling sites and the increased popularity of Las Vegas as a tourist destination, sports betting has become a big business. Forbes.com estimates that $82.5 billion to $382.5 billion is wagered on sporting events in the United States each year. Sports betting shares one very important similarity with blackjack: It is a game that its players may beat using analytics and statistics.
A player simply needs to create a model that helps him pick winners at a rate higher than the casino/sports book commission. In the most standard and popular bet, the point spread, the casino takes a 10 percent commission. For example, in the most recent Super Bowl pitting the Colts against the Saints, the Colts were favored by five points. This means that if you bet on the Colts on the point spread, you would be betting on them to win by more than five points. If you bet $100 and the Colts won by more than five points, you will win $100. If you bet $100 and the Colts won by fewer than five points or outright lost the game, you will actually lose $110. So, the ability to pick winners against the spread at greater than a 50 percent clip is not good enough. You actually have to be able to average close to 53 percent.
How hard is it to do this? Ask the hordes of sports bettors who have bankrupted themselves over the years trying or the false disciples who sell their picks and boast about their records only to flame out when their information yields more losers than winners. One such tout once explained to me that he doesn't like to show the records of his so-called experts since that would only "discourage sales" as most of their records centered around 50 percent. In general, there are very few people who can consistently beat the casinos and even fewer who actually talk about what they do. Bob Stoll is one of those few.
Bob Stoll, or Dr. Bob, as he is known to the world, studied statistics at the University of California, Berkeley, and got his first taste of sports gambling during his sophomore year. He was already an avid Oakland Raiders fan and became more interested when a friend started a contest at a local bowling alley to pick each NFL game against the spread. The contest cost $2 to enter, and Dr. Bob decided that by using some simple statistics, he might have an edge on the competition.
As there weren't many real personal computers in the early 1980s, he did his calculations by hand, creating a simple equation that would help him use meaningful data from previous games to predict the points scored by each team in each game. He went 12–2 that first week picking NFL games against the spread and won $102 for his work. When he recounts these winnings, he smiles as if recalling one of the proudest moments of his life. He has since won millions of dollars wagering on sporting events, but for someone like Stoll, it isn't so much the money that drives him—it's the challenge of figuring out the system and beating it.
As Stoll continued the pursuit of his statistics degree, he saw parallels between what he was learning in the lecture hall and his newfound sports gambling hobby. During one specific class, he thought there might be a direct application to use the Fourier series to forecast team performance over time.
He had noticed some similarities in the performance of NFL teams over time with the patterns he was studying in the Fourier series, and he hypothesized that this type of analysis could be used to help predict the performance of sports teams. After discussing it with his professor, he was introduced to a colleague named Dr. Mike Orkin. Orkin had developed a piece of software called a Point Spread Analyzer. It allowed a bettor to search through large data sets of past games and query how teams had performed in the past when faced with different situations. Stoll and Orkin shared ideas about how teams' performances changed from week to week, and technical analysis in sports gambling was born.
Stoll began writing articles for a well-known gambling publication called The Gold Sheet on this concept of technical analysis in sports gambling. For a long time people had known that teams behaved in strange ways throughout the course of a season—like let-downs after a big win or suddenly playing well and bouncing back after a big loss—but until Stoll's work, no one had really found a way to predict it reliably. This publicity helped launch Dr. Bob's career as someone who provided advice to gamblers, and his business grew with the rise of the Internet and e-mail. Eventually, Sam Walker, writing for the Wall Street Journal, proclaimed him "The Man Who Shook Up Vegas."
Reading about Dr. Bob, one might think of him as a maniacal genius locked away in a basement with huge mainframe computers and servers storing terabytes of data. But as I sat with him on a Sunday evening in his townhouse in the Haight-Ashbury district of San Francisco, it didn't occur to me that he is the most brilliant mathematical mind I've ever met. But he could be the most confident.
Excerpted from The House Advantage by Jeffrey Ma. Copyright © 2012 Jeffrey Ma. Excerpted by permission of Palgrave Macmillan.
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