Las Vegas vs the Law of Large Numbers

Nassim Taleb likes to use Las Vegas as an example of a mathematical odds-based

business which exists in economic theory much more often than it exists in real

life. If you run a bunch of casinos with hundreds of thousands of punters coming

and and betting hundreds of millions of dollars, then you can predict with some

accuracy the amount of money you’re going to make at the end of the quarter:

it’s called the law of large numbers. Except just look at what’s

happened at Las Vegas Sands Corp:

The company had a very unlucky summer: Its “table games win percentage,”

which is the ratio of revenue from table games to chip purchases for those

games, was just 14.7%. That was down from 23.4% in the year-earlier quarter,

and an average of 22.9% over the prior 15 quarters — when it never dipped

lower than 16.1%…

Its take from table games reached a peak of 36.9% on chips purchased in the

fourth quarter of last year, and have declined each quarter since.

Now of course there’s more than just luck involved in these numbers. The more

time you spend at a table, and the higher your bets at that table, the greater

the percentage of your chips that you’re going to lose there. And a casino can

lose its touch when it comes to persuading punters to stay long and bet large.

Investors will be hoping that Sands is merely unlucky, rather than incompetent.

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