28 May 2011

Roulette vs Lottery

I was having a chat with a friend for dinner and was talking about a time when I was hanging out with friends at the casino where we played roulette. She criticised me and told me that roulette is a loser's game. However, I remember she told me that she always purchased around $20 worth of lottery tickets every week. 

She justified herself, saying that that if you walked into a casino and played roulette, you don't win much and the odds are against you in the long run. However, she claimed that lottery games involve small sums spent ($20 per week) with the potential for winning massive amounts that can set you up for life.

Let me start with the qualitative arguments I put up to justify my playing roulette. I believe that in both the lottery and roulette, the odds are against you, but I played roulette not with the expectation of getting financial freedom but with the expectation of just having a good time. I played because I wanted to enjoy myself with friends. There is something very exciting about handing over money to someone and then having the fear, anxiety, and excitement of not knowing how much money you will get back. This is why roulette (or blackjack, baccarat, or any other casino card game) is fun. However, the lottery is a different beast. I used to play the lottery before I calculated the odds. When I played the lottery, I did not do so with the expectation of having fun with friends. I played the lottery because I felt trapped in a boring, low-paid job and saw the lottery as an escape. A lottery ticket in my hands was my way out. It provided me with hope that I could one day become a multimillionaire and with those millions all my problems with disappear. Although this is my experience with the lottery, I find that many people I speak to share the same sort of psychology when it comes to playing the lottery.

Let me move on to the quantitative argument. It is possible to walk into a casino with a small amount of money and walk out a multimillionaire. For example, if you put a $25 chip on one number on a roulette table and win four times in a row, since the payoff is $35 for each $1 you put on, then you will get 25*35^4= $37.5 million. The probability of your number showing up is 1/37 = 2.7 per cent. However, to win four times in a row, the probability of that happening is (1/37)^4 = 1/1874161 = odds of 1874160 to 1.

In other words, you can walk into a casino with $25 and walk out with $37 
million but the odds of that happening are about 1.9 million to 1.

What about the lottery?

Every lottery is different depending on which country you look out and which game you look at. However, let us choose a standard lottery game, such as the standard Tattslotto game provided by Tatts Group Limited. The Tatts Group was kind enough to disclose on their website the odds of winning, the prices of tickets, and as well the payoffs given to winners in the last draw. The payoffs of winning Division 1 (the highest payoff) is about $4.3 million. The odds of this happening are 678755 to one for a standing 12-game ticket. The cost of a 12 game ticket is $7.85 as at May 2011.
How in the world does this compare to roulette? Well, let us assume that in roulette you can have a $7.85 chip and in order to win $4.3 million you will need to win a theoretical 3.71654 times in a row (7.85*35^K = $4.3m and solve for K to get K=3.7), and the odds of this happening are 673430 to one, which is better than the lottery but surprising not so much so.

What about betting limits?
Some argue that most casinos have betting limits that will prevent you from putting more than, say, $1000 on the table at once. But this does not matter. If you put $25 on one number on the roulette table and you get it right, you will win $875, and if you put $875 on one number and win again you will have over $30,000. Suppose you take that $30,000 and bet $1000 thirty times. The odds and payoffs are still the same. The house edge for roulette is a little higher than 5% but let's say it's 5 per cent for this example. Suppose I had $100 and I put it on the roulette table. I am expected to get back $95. However, suppose there was a betting limit of $50. I think divide by $100 into two $50 groups and then bet $50 twice. My payoff from the first bet is $47.50 (5% of $50) and my payoff from the second bet is also $47.50 as it is an identical bet. Therefore after two bets my expected payoff is 47.50*2 = $95, the same as if I had just put $100 on the table. 


What this post should prove is that the lottery and the casino are similar in odds and payoffs. You are expected to lose in both games, and you will lose and win roughly the same amount. The problem is that many people view casinos are dirty places where criminals live whereas lottery tickets are often seen as family-friendly and harmless.

127 Hours

I started watching the DVD of 127 Hours a few days ago but stopped watching after twenty minutes in because my family had returned home and the house was too noisy for me to watch a movie. My initial thoughts were that this film did not seem that appealing.

I have watched the next 25 minutes of the movie but have switched off because the movie seems to be getting into a very gruesome part.
This movie 127 Hours is the true story about a man who goes hiking in the canyons, falls, and then unluckily a large boulder crashes on his arm, trapping him. In order to save himself, he amputates his own arm and escapes.

I watched the movie up to the part when he looked like he was going to attempt to cut off his own arm, and when that looked like it was going to being, I switched off and decided not to watch. It just makes no sense for me to watch a movie that is essentially a torture movie.

Many critics love this movie, saying it is very realistic and painful to watch, but these reasons why the critics love the movie are the reasons why I hate to watch it.

15 May 2011

Why Australia Needs Class Warfare

With the release of the Federal Budget 2011-12 by Prime Minister Gillard, the opposition Liberal party led by Tony Abbott has accused Gillard of class warfare.

It is my opinion that class warfare in a country is a good and healthy thing, but first let me define what I mean by class warfare. Within any country there is a distribution of wealth and as a result there can be classified different classes of people based on wealth. Within most countries there are poor people, middle-class people, and rich or upper-class people.

Under authoritarian regimes, rich people tend to own slaves and oppress the poor, using them to run their businesses. The democratic system gives poor people a voice through the government, allowing the poor to push back at the rich so that they are not fully enslaved. This is class warfare. When the poor push back, they get benefits like public holidays, sick leave, maternity leave, recreation leave, and a host of other benefits that workers in authoritarian countries don't have.

To ensure that poor people get these benefits, they need to be constantly aware of class divisions and to vote for their own class interests in elections.

Unfortunately, in many democracies, while the majority of poor people are class conscious, a significant number of poor people actually vote for parties that implement policies that disadvantage them economically. In American following the 9/11 terrorist attacks, 80 per cent of Americans voted kept George Bush in power, allowing him to implement tax cuts to the rich. Under his presidency, public debt soared and the gap between rich and poor accelerated dramatically. In Australia, refugees tried to hop on a boat and come into Australia. The Prime Minister John Howard turned the boat back. His tough stance saw just about everyone, including the poor, vote for him. When he came in, he implemented policies that diverted public money to the rich e.g. by giving tax breaks through superannuation funds, family tax benefits that even high-income households were eligible for, and of course WorkChoices. In countries like Thailand and Cambodia, the leaders there clash in small-scale wars along the border, both leaders afraid of starting an all-out war but both still very willing to talk tough in an effort to appear nationalistic. This tough stance wins votes and distracts the voting population from the immense wealth held by the elite in both countries. The King of Thailand is the wealthiest royal in the world with a net worth of $30 billion, over sixty times higher than the net worth of the Queen of England (around $450 million).

For many centuries, history shows that the rich often use nationalism to win broad support in democratic systems. Once in power, they implement policies that benefit themselves at the expense of the poor. A poor working-class American will continue to be loyal to the rich as long as he views everyone in the world as being either American or non-American. He feels united to his employer, the one who is exploiting him.

Class warfare allows poor people to suddenly realise that there are indeed divisions within countries. Class warfare allows the poor to demand policies that work in their own interests.

Further reading: Rich and poor divide underestimated

14 May 2011

The Federal Budget 2011-12

The Federal Budget 2011-12 was released this week. Everyone else is giving opinions on it, so I may as well. All in all, I think it is a positive budget that would hopefully get Australian back into surplus by 2012-13. The growth in revenue seems optimistic and the spending cuts are probably in my opinion not deep enough, as much deeper cuts are needed in middle-class welfare. But all in all, it is a step in the right direction, that is, keeping taxes high and cutting spending. It follows the fundamental rule of personal finance, which is to spend less than you earn.

In the world of FBT, the budget gets rid of the loophole that allows tax benefits to be accrued if you drive your work car more than 25,000 kilometres per year. This horrendous loophool meant that many small businesses actually deliberately drove their company cars more than they needed to in order to get tax concessions.

A number of people complained that there were no increases in family tax benefits for those earning over $150,000, which I thought was incredibly surprising as those on $150,000 are definitely rich given that the average household earns around $70,000. For Australia to get back into surplus, spending cuts need to be made or taxes need to be raised, and cutting spending or increasing taxes on the poor is not only highly immoral but could actually kill them. Therefore, the rich need to be sacrificed. I am surprised that there was so much opposition to this idea, even among religious people and poor people.

The budget contianed no details about the coming carbon tax, which is disappointing. I am happy with the carbon tax as I think it is one of the best ways of cutting carbon emissions in Australia. It gives me great pleasure when I look at those people driving large SUVs and live in large McMansions and know that they will soon be punished for their behaviour. The carbon tax is understandable unpopular with many people believe most people don't like the idea of cost of living increase. This is why I believe that Prime Minister Gillard needs to give very generous compensation to low-income people. It is already disappointing to hear that only half of the revenue raised will actually go to compensating low-income people (it should ideally be 100 per cent). If I were Prime Minister Gillard or if I were her adviser, I would suggest that the way she go about compensating people is to made amendments to the low income tax offset (LITO). Specifically, she should increase the LITO payout and increase the threshold when you are no longer eligible for it. This will put money back into the hands of the poor and give a moderate amount to the middle-class. If the compensation is large enough, I am sure just about every single Labor supporter will be happy and a substantial number of Liberal voters will switch sides and vote Labor to secure for themselves the compensation, and Prime Minister Gillard will win the next election.

We'll see what she does.

01 May 2011

Aid Workers Jailed for Fraud on USAID and World Vision

Two aid workers were jailed for 12 years for defrauding USAID, an American aid agency. USAID contract World Vision to use $1.9 million to help poor Liberians. Under the initiative, the two aid workers were required to monitor World Vision workers as they distributed aid. But the two aid workers instead sold the food and pocketed the profits. The fraud was revealed by an internal audit by World Vision.

That the fraud was caught by World Vision's internal audit should give World Vision donors most confidence that the money they provide to the non-profit organisation is being used legitimately. If a humanitarian agency has no bad news, it is likely that the organisation has no internal or external audit function. World Vision has not only an internal audit function but is also externally audited by PwC.