The Web Site of Victor Niederhoffer & Laurel Kenner
Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place.
Write to us at: (address is not clickable)
The Specs in Vegas
Deception, Part I
By Victor Niederhoffer
A just completed trip to Vegas was helpful to me in developing new ways of appreciating the pervasive influence of deception on markets.
Deception is usually classified into levels:
Level 1. Imitative, mimicry, camouflage, unchangeable
Level 2. Coordination of perception and response. The angler fish sending out a lure. Variable behavior.
Level 3. Learned deception. A dog learns to feign injury to elicit more sympathy based on trial and error.
Level 4. A perfect lie. Programmable behavior. Insight. The feigning of lack of interest in sex to throw the competitor off guard.
Level 1 market deception might be the person who counts the cycles in the stock market based on ending digit or year relative to presidential election.
Level 2 market deception mite be the specinvestors who refuse to hold over the weekend based on the big down opens that occurred the last 2 weeks.
Level 3 deception is the Friday Monday effect with Friday down forecasting Monday down which hasnít worked in 17 years.
Level 4 deception might be the ambience of encouraging traders to buy get-rich books to improve their results and encourage more active trading. Or at more general level the entire backdrop of wrong thinking that makes the investor contribute so much more to the market than they would with just a simple buy-and-hold strategy.
Vegas is replete with Level 4 deception. Magic shows and total out of mind and body experiences enable the public to enter a fantasy world. The sense of time is abolished; the casinos have no windows, no clocks, no darkness, no natural light. The chips are used to get cars, to pay for hotels, and to help the investor to divorce himself from the reality of effort and money that is the foundation of rational decision making in real life. The sense of place is destroyed by the exotic locations, with Venice, the Pyramids, Paris, Monte Carlo, Italy, New York, just a monorail ride away.
Sex is beautifully used to make the average Joe think he's a somebody and I enjoyed most the shadow nude dancers at many of the hotels, that allow the fantasy of beauties undressing just behind the screen. Fortunately, "the Boy" was there to restrain me when I was so enthralled by this latter, nay by the whole ambience, that I flung myself against the rope barrier in an attempt to get closer to the action.
The highlight of the tour of deception, however, for me, was the video
screens that reported the last 24 spins of the roulette wheel classified by
number and color over all the modern machines. As an instance of masterful
Level 4 deception with grave but salutary implications for all market players,
I will take the liberty of elaborating further on that new method of luring the
prey into the mouths of the predators with some probabilities of false seasonals
-Ė Victor Niederhoffer
A learned spec adds:
Level 2 - Make the carpet ugly as hell and keep the patterns really confusing to the eye so that you will be enticed only to look at the beautiful colored slot machine, kinda like
Wall St. making numbers or prices so ugly but oh those beautiful, alluring charts, ooooh those candelabra candlesticks, oh watching those
Elliot waves form in front of my eyes, there must be profits in those charts, not in the prices and the math they beget
level 4 - "you can beat the dealer, turn to channel 2 as a voluptuous, skinnily clad blonde describes with red lipstick the finer aspects of how to accept the next card properly", sorta like turning to the old Maria or the newer Mrs. Glick and getting the exact reason for the recent rally or plunge and knowing next time "how to avoid or participate"
the best for last
level 4 - Tell 'em it isn't random, even though it mostly is to keep 'em thinking they can figure it out ,and they really think they are getting a good deal on the room, buffett and drinks is the opposite of tell 'em its completely random and they will never figure it out so send your check to the P.O. Box on Wall st., when you see the non-randomness.
anybody notice the smell, odors, aromas that they are using now in casinos? what about the "No clocks" allowed policy? -- J.T.
While in Vegas,
the Specs had occasion to dine with Mr. "Boy Plunger", a friend of Vic and admirer of Soros, Livermore and the Jackson family whose approach involves schismogenesis.
When not being restrained from watching the shadow dancers by the "Boy" in Vegas, I like to play roulette. My method is to walk thru the casino, find a screen that indicates that 4 of the last 20 spins landed on the same number and then play that number. Most people would like myself consider that non-random. I speculated, however, that such a clustering is random, my method of play made me a sucker, and that the screens are designed to induce over-playing the same way the charts and systems and screens are designed on Wall/LaSalle Street. Recall at the outset that there are 38 numbers you can bet on 1-36, and 0, and 00 in roulette. The chances of rolling exactly 4 of a specified number like 1 out of 20 tosses is given by 20C4 *p^4 *(1-p)^16, where p = 1/38, which comes out to 0.0015. As a first approximation, for such an event not to occur, i.e. a failure, the probability would be 1 - 0.0015 or 0.9985. Now for there not to be at least 1 occasion of exactly 4 among the 38 possible numbers would be 1 - ( 1-0.0015) to the 38th. That comes to 0.056. Lack of independence and more than 4 changes the answer as follows as determined by simulation and a recursive formula.
at least 4:
at least 3: 0.47
at least 2: 0.997
Thus, we see that if you walk around several casinos and look at say 11 machines, it's better than a 50% chance i.e. 1 - (0.94) to the 11th that you'll find at least one machine with 4 or more of the same numbers, due to chance variations alone. Most are easily deluded by this tendency of randomness to cluster. The related birthday problem, how many people must be in a room for the chances to be at least 0.5 that 2 or more people have same birthday, i.e. 23, is equally surprising and non-intuitive. You can see how easy it is in looking at say one month that was up 23 of the last 24, or one year that was up 10 of the last digits ending in 5, or one day of the month that was up 28 of the last 30 or, amusingly, one party that won in 8 of the last 8 elections, when the Dow was up or down on one month or another. or if not the party, then the incumbent, or if not the Dow, then the S&P, or the economy et al., to be deceived and overtrade. Thanks to Doc Castaldo and Mr. Downing for the simulation and the subsequent discussion and documentation which they'll carry out. -- Victor Niederhoffer
The general problem is:
A number between 1 and m is drawn p times (m is 38 and p is 20 in the Las Vegas roulette example). What is the probability of observing exactly k (or k or more) of a number not specified in advance within the p draws.
This web site has recursive formulas for calculation for general m,p,k:
What surprised me most about the results is how unlikely it is for the 20 numbers to be distinct; there is almost always some number repeated (i.e. k=2 or higher) and, as the Chair showed, it is not too difficult by looking at several machines to find one that has exhibited a higher repetitiveness (i.e. k=3 or k=4) for some number. From there one could easily conclude that that number is "lucky" for that particular machine.
So what does the roulette problem have to do with investing?
Here are the best months for the stock market in the last 6 years:
|Year||Best Month||S&P Return|
A remarkable seasonal pattern emerges: October is the best month.
Choosing the best month from each year is like a drawing a number between 1 and 12 six times. What is the chance that a number (which happens to be 10 or October, in this case) is drawn three or more times?
Using the formulas discussed previously, which I assume everyone is now familiar with, we have P(12,6,3) = 0.114
So it is not all that unlikely (compared to the usual 10% or 5% limits) that such a result could have been due to chance.
I'm traveling to Vegas next week for the Madonna concert. LOL. Due to gambling burnout in a past life, I rarely play any more, but when I do, I follow these rules:
1) Never forget that the purpose is entertainment, not to make money any longer.
2) Play the game that is the most fun...for me this is craps.
3) Always play with a group of friends, the more the better. My craps strategy is this:
4) Use your group to commandeer a table. The lower the minimum the better. $1 is best if you can find it. Downtown is usually better than the strip. Look for at least double odds.
5) Start playing, throwing lots of bets around the table, pressing everything up, though I can't force myself to do the prop bets. Also bet the Don't, so that somebody is always winning and losing.
6) Make lots of noise...whoop it up, yell and scream and have lots of fun. This will attract a crowd, and they'll start playing and will join in. Take their minds off the money, just interact and entertain and you're guaranteed a good time.
7) You can have a great evening for less than $100.
Steve Ellison adds:
I am heading to Reno later today. My favorite casino game is craps. Sometimes I win, sometimes I lose. I play in a very disciplined fashion with strict money management. Here are the basics of my method:
1) Never, never forget the house always has the edge. There is no system that can
overcome this edge.
2) Know the odds and avoid the sucker bets. If you bet the pass line with double odds, the house edge is only 0.6%. The field and hardway bets are sucker bets as the house edge is over 10%.
3) Remember that one of every six rolls is a 7. Do not press winning bets. Take money off the table if no 7 has occurred in 10 or 15 rolls.
4) If you are winning, make sure you quit while you're still winning.
5) ALWAYS play streaks. You can only lose once betting with a streak. You can be wiped out betting against a streak that stubbornly refuses to end.
The first theorem of Actuarial Science is the "Theory of the Probability of Ruin" which has morphed into such further applications such as "Monte Carlo simulations" where the roll of the roulette wheel is used for risk management planning probabilities...
The fact that roulette is used as the game theory for the entire worlds financial management is vital to consider for it argues that there are no bias rules that allow one to profit from same.
In fact there is no better way to gamble with the house than roulette...especially playing red and black RATHER then ever trying to forecast the number the ball will fall on...
I could spend my life beating red and black but in time I would be kicked out of the casino and identified as they do with card counters...
Las Vegas etc KNOWS there are ways to get beaten for large amounts over long periods that don't end...and it sets the rules, like table limits, and ejecting WINNERS they have identified, who use nothing but common sense rather than luck and bully like deceptions on those emotionally incapable of betting in a logical way...
Victor likes to make such bets as he has disclosed for entertainment first...like hitting a three wall killer shot in squash with his eyes closed playing backhanded...
Years ago, not long after the '87 crash, I was chatting with a pal of mine, Ken Arnold, an expert backgammon player and founder 'n' chief of gamesgrid.com where I play backgammon and gin. He told me he'd recently run into Paul Magriel, once I think New York state chess champion, but known primarily as a backgammon player guru and for his book, "Backgammon," an excellent starter text and winner of awards for its excellence as teaching textbook. Bios generally list him as a professional backgammon player.
When Ken asked asked him what he'd been up to, he replied: "I'm trying to beat roulette." Ken, as aware as any with even a modicum of math, said "That's Impossible, Paul, you can't beat that game."
"Well, actually," said Paul, "I think you can! I've noticed there is a time from when the ball first hits the spinning number (whence it ricochets and bounces around for a bit before arriving at final destination) during which period you can continue to place bets. I have also noticed that there is a tendency for the ball to finish up in the quadrant of the circle opposite the one where it first hits and gets deflected." Paul had memorized the sequence of numbers on the spinning deck, which are not sequential, adding a bit to the challenge, and, with a practice wheel in his apartment, was spending long hours getting his hands to move fast enough to get the requisite bets down before les jeux sont faits. As I recall the conversation, he said he needed to get all bets placed in 2.2 seconds.
In due course, apparently satisfied his dexterity had optimized at the bogey, armed with a kit bag of wagering greenery, he set off for the clubs of London to ply his talents... sadly in a way, when he returned from his junket, he was able to report a profit, but one which he had to reluctantly admit was paltry and not commensurate with the huge effort entailed to win it.
I note now via the internet that he has turned his attention to poker.
For me this is a funny story, but the instruction in it is that some of the most interesting journeys begin with a different and more creative take on matters accepted as conventional wisdom.
One of my greatest passions in life is roulette. After years of extensive research and computer work with my Monte Carlo generator I discovered a system which reduces the house edge to exactly even money, which is pretty exciting for those of us in the roulette world. Here it is:
1. First, you can't bet anything other than single numbers, as the rest are all sucker bets. Red, black, groups of numbers (1 to 18, etc), odd or even are all unplayable
2. 0 and 00 proved unprofitable (that's how the house makes its money , right?)
3. The Fibonacci numbers (for some unknown reason) give the house the edge too, so we must exclude them.
4. Odd red numbers and even black numbers also tilt the advantage to the house so must also be eliminated (preliminary research indicates the cause of this to be a result of the clever color patterns on the roulette board).
5. All numbers that are evenly divisible by 3, unfortunately can't be bet either as the house edge is remarkable.
6. Numbers 11 through 17 provide the house with a small edge, so let's take them out
7. Numbers 29 through 32 also favor the house, so they're out.
8. Finally, be sure to exclude the number 35...only absolute fools play the number 35.
Everything else is completely playable and cuts the edge to exactly zero! In fact, by diligently following the above system (no cheating or deviation) you are assured to walk home with EXACTLY the same amount of money you entered the casino with...provided you don't play any of the other games on the way to the door.
Hope this helps all those gamblers at heart.