Before You Bet, Understand Expected Value!

With the upcoming super-bowl and all the betting surrounding it, you should understand expected value before you make any bets.

Informally, the expected value can be interpreted as the long-run average of the results of many independent repetitions of an experiment. (from wikipedia)

By using expected value as a guide over your life, you should come out ahead.

How to calculate expected value:

Say you have two options, one is to bet in a superbowl grid and the other is to bet on a 0-9 pool. To calculate the expected value of each do the following:

Expected Value = – (chance of losing * amount lost) + (chance of winning * amount won)

Ex. -(.99 * $100) + (.01 * $10,000) = $1 (Superbowl Grid)

(The above is simplified as with the grid you have a .01 chance of winning each quarter and for the half)

Ex. -(.9 * $100) + (.1 * $1,000) = $10 (0-9 pool)

Which would be the better choice?

In most decisions in life you would prefer the expected value be more than the amount at risk, this rarely happens with betting and is the reason the house always wins.

Milton Friedman on Inflation

From “Free to Choose”, chapter 9

Below are Milton Friedman’s five simple truths regarding inflation.

  1. Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various)
  2. In today’s world government determines – or can determine – the quantity of money
  3. There is only one cure for inflation: a slower rate of increase in the quantity of money
  4. It takes time – measured in years, not months – for inflation to develop; it takes time for inflation to be cured.
  5. Unpleasant side effects of the cure are unavoidable.

The United States has embarked on rising monetary growth four times during the past twenty years. Each time the higher monetary growth has been followed first by economic expansion, later by inflation. Each time the authorities have slowed monetary growth in order to stem inflation. Lower monetary growth has been followed by an inflationary recession. Later still, inflation has declined and the economy has improved. So far the sequence is identical with Japan’s experience from 1971 to 1975. Unfortunately, the crucial difference is that we have not displayed the patience Japan did by continuing monetary restraint long enough. Instead, we have overreacted to the recession by accelerating monetary growth, setting off on another round of inflation, and condemning ourselves to higher inflation plus higher unemployment.

We have been misled by a false dichotomy: inflation or unemployment. That option is an illusion. The real option is only whether we have higher unemployment as a result of higher inflation or as a temporary side effect of curing inflation.

In my view, we have and will have higher unemployment as a result of higher inflation. I think we are currently in the economic expansion from monetary growth. Based on comments earlier in the same chapter, increased monetary supply takes six to nine months to work its way through the system to increase economic growth and employment. Another 12 to 18 months elapse before the price level appreciates and inflation occurs or is speeded up.Given that a sharp increase in money supply started mid 2008, that would point to first quarter 2009 impact. This may be consistent with the above as we saw a market bottom in March 2009. So that would point to the end of the 1st quarter 2010 to the 2nd quarter 2010 to start seeing increased inflation.

Let’s see what happens.