It's Just Money

Poker: Luck or Skill?

There was a very interesting article in this yesterday's Wall Street Journal about America's recent favorite pastime, Poker.  The question was asked whether or not poker is a game of chance or a game of strategy and skill.  It is clear to me that it involves a tremendous amount of skill to be a very good poker player.  Luck, of course, will always play a factor.  I have a puncher's chance of beating Phil Ivey on a lucky "all in," but if you have ever seen Joes vs. Pros, you know that professional athletes will dominate you EVERY TIME.  Let's be honest.  Could you strike out Barry Bonds?  Once?  Stop Jordan from scoring?  Once?  The answer is no.  You won't.  Not once.

So, if I have a chance against Phil Ivey or Howard Lederer, what makes Poker a game of skill?  Two very good points were raised in the article.  First by Annie Duke, "you can purposely lose at poker if you choose."  It's a good point.  The ability to affect the outcome is present, unlike roulette, or horse races.  Yet, in blackjack you could hit on 21, ensuring a loss.  Does that make blackjack a game of skill?  Hmmm...

The second point was raised by Annie's brother, Howard Lederer, "the vast majority of high-betting poker hands are decided after all players except the winner have folded.  So if no one shows his cards, can you legally argue that the outcome was determined by luck?"  Another great point by the poker superstar sibling.  If no one sees any cards, the cards did not play a role in the outcome.  Thus, the outcome was determined by the betting of the players, clearly a process of skill or strategy.

There are some genuine business concerns over the question.  The recent ban on internet gaming was specifically a ban on any "game predominantly subject to chance."  The whole thing is rather annoying.  Why ban it?  Let it happen, try to put check in place to prevent minors from gambling online, and find a way to tax it.  Everyone wins.

I have a follow up question.  Is investing in stocks a game of luck of skill?

Based on Annie's point, can you intentionally lose?  The answer seems to be no.  So, how does picking stocks involve more skill than picking the winner of the Warriors/Mavericks series?

I'm Back from Vegas, and a Bit Richer!

Heading out to Vegas last week, I said somewhat jokingly, "hopefully, I increase my net worth by Sunday!"  What do you know, I did!  What a roller coaster of funds it was, but I suppose that's Vegas for you.  Here's my saga.

We drove to Vegas, leaving Thursday morning at around 11am.  We spent just a few bucks on snacks for the road, planning to stop at the In N' Out in Barstow for lunch.  A friend was flying in and scheduled to land around 4:30, so the plan was to get there at the same time to pick him up from from the airport on our way into Vegas.

Well, about ten miles from the Vegas strip, coming off a downhill slope, I let my speed get a little bit high, and wouldn't you know it?  Flashing lights.

NBC's Windfall: Looks like a flop of a show, but raises an interesting question

We have talked about the lottery here before.  The usual questions, what would you do with the money, should you take cash value or payments?  NBC's summer drama, which apparently is code for, "this wasn't good enough to release during the regular season against real shows," Windfall presents 20 friends who win a share of an enormous lottery jackpot, and the woes that follow.

Gambling in Vegas for cheap

As I have mentioned before, I enjoy gambling.  I know that it's a loser's game.  You can win a few hands, or come out ahead for an entire trip, but if you keep going back, the house will always beat you.  It's pretty obvious, they aren't building billion dollar casinos on the brunch buffet profits.

Nonetheless, I enjoy it.  Call it an indulgence.  I go to Vegas about three times per year, and I always spend some time at the tables and slots.  I have never lost more than about $400 in one trip, but have never won more than about $200.  I have found that there are a couple of keys to having a good time gambling, while not breaking your budget.

What would you do with a winning lottery ticket?

I don't mean the lottery winnings.  Let's say you got home from work, saw the lotto numbers on the evening news and thought, "oh yea, I should check my ticket."  And, lo and behold!  You're holding in your hand $20 million, or whatever ridiculous amount.

The Lotto office is closed, so you can't rush down there immediately.  You have to wait until the morning.  So, what do you do with the ticket?

Charles Barkley: "When I gamble I should be playing $1,000 a hand instead of $20,000 a hand"

We all have bad habits.  I bite my finger nails, I snack on unhealthy foods.  How about you, do you smoke?  Crack your knuckles?  Shop too much?  I dunno, we all have something, right?

Well, Charles Barkley does too.  He gambles.  "It's not a problem," he explains in a recent Fox Sports article, "If you're a drug addict or an alcoholic, those are problems. I gamble for too much money. As long as I can continue to do it I don't think it's a problem. Do I think it's a bad habit? Yes, I think it's a bad habit. Am I going to continue to do it? Yes, I'm going to continue to do it."

Well then.  Excuse me.

He goes on to say that he has lost about $10 million gambling.  I figure I have lost about $20,000.

84 year old woman wins $10 Million Jackpot

After playing $40 on a Nickel machine, Josephine Crawford was about to call it quits.  She was down to her last five dollars in credits.  I love this story.  This woman is 84 with two daughters, five grand-kids, and three great grand-kids!  She is widowed and a retired waitress.  She drives a new Honda Civic, and loves to go to Atlantic City to play the slots.  Don't we all know someone like her?

How much would your life change after winning $10 million? 

After Winning the Lotto, Should You Take the Cash Value or Annual Payments?

So, you won the lottery, now what?  Well, there's lots to do.  Build the barbed wire fence around your home, start digging that moat, change your phone number...  Busy times for the newly wealthy!

Before you do any of that you have one important decision to make.  Probably the most important one you've ever had to make.  Do I take the cash value today or should I take the annual payments?  let's run the math.  Each state may be a little bit different, but the California Lottery gives the option of a cash lump sum that they estimate at around 45-55% of the jackpot amount.  If you select the payment option, you will receive an increasing payment over the course of 26 years.  The first payment will be 2.5% of the jackpot, increasing to the 26th payment of 5.1% of the jackpot amount.

They give a sample payout of a $7 million jackpot, which is the lowest jackpot possible in the California Super Lotto.  Their site goes so far as saying, "these payments would gradually increase each year until the final payment of $357,000 - a 100% increase over the first payment!"  Like it's a good thing that you get more of your money later than sooner.  What again is the first rule of Time Value of Money?  Oh yea, money is worth more today than tomorrow.

Based purely on the math, which one should you pick?  Well, their range of 45-55% for the cash value complicates things a bit.  But here are the calculations.  If the cash value is 45% of the jackpot, the Internal Rate of Return (IRR) on the payments (the return you would effectively receive on your stream of payments) is 6.17%.  If the cash value is 50% of the jackpot, the IRR on the payments is 5.24%.  If the cash value is 55% of the jackpot, the IRR on the payments is 4.43%.

In other words, if you think you can generate a return higher than the respective IRR, you should, based on the math, take the lump sum.

But it's not that simple.  We have all heard stories of people winning the lottery and within a few years find themselves divorced, friendless and broke.  Can you handle that sort of money all at once?  I think most of the people reading this fall in the camp of "yes, I can handle it" and truthfully can.  I believe that the majority of people cannot.

The majority of people would have a difficult time with that sort of money, and will be susceptible to scams, poor investments, wild spending or over gifting or lending to friends and family.  Here's where you throw the math out and consider the psychology.  Most people want an income.  Not an asset or a business, but an income.  The payment stream gives them that.  In the California Lotto example the first year's payment would be $175,000.  Let's say they blow through it.  Wild trips to Vegas, new car, etc.  Worry not, they have $189,000 coming next year.  Now let's say they blow that in gifts and loans that will never be repaid.  Well, year three they get $196,000.  That one disappears with the scam artists.  At some point, I have to believe that this person is going to figure out how to actually get some decent help, and take care of that money.  With a lump sum, he has one shot.  Blow it and the money is gone.

So, I'll probably take the cash value when I win.  If you asked me what you should do, I'd probably tell you to take the payments.

By the way, here's my simple spreadsheet that breaks down the IRR: Download lotto_irr.xls

 

Bad Decisions in Deal or No Deal

Why do so many people leave Deal or No Deal empty handed?  Because they make poor decisions.  I have some thoughts about what drives this decision making.  Let me tell you about this guy on Friday's show and what he did.

First of all, his run on the show began on the previous episode, which I didn't watch.  So, I don't know much about his background other than he is a stay at home dad, and they were hoping to win enough from the show for the family of four's dream trip to Fiji.

As Friday's show began, he had turned down a $34,000 offer with six cases remaining, $5, $10, $200, $300, $5000, and $300,000.  Hitting the $300,000 case would be catastrophic.  He hit the $5,000 case, bringing in an offer of $52,000.  The highest previous offer was $55,000.  He gave a corny speech about great people making you believe, and little people making you doubt your dreams.  Sounded like the kind of talk you hear at multi level marketing meeting.

He turns down the $52,000.  I would have taken it.  He hits the $300 case, bringing the offer to $76,000.  Now the two kids (cute little boy and girl around 10 and 11) tell dad to take the offer.  The kids are right.  Not just because of what is about to happen.  Wife says that she "feels good" that he has the $300,000.  He doesn't take it the deal.  Wife yells out how much she loves him and believes in him, and the kids groan, "Oh my God, Dad!"