All Business

THE FOLLY OF THE FIELD BET

Or, all I need to know about market psychology I learned playing craps

STEVE MAICH September 20 2004
All Business

THE FOLLY OF THE FIELD BET

Or, all I need to know about market psychology I learned playing craps

STEVE MAICH September 20 2004

THE FOLLY OF THE FIELD BET

Or, all I need to know about market psychology I learned playing craps

All Business

STEVE MAICH

A LAS VEGAS CASINO is not the best place in the world to make investment decisions, what with the free drinks and all. But the casino floor is the ideal location for observing stock market psychology in action. Nowhere is the interplay of fear, greed, arrogance and adrenaline more obvious than at the green-felt craps tables of Sin City. On a recent trip to Vegas, while staring through a thickening haze produced by free rum-and-Cokes and shooting dice next to a broad array of affable tourists and affected hipsters, I was

struck by the parallels. The pressures and pitfalls of casino gambling and stock investing are exactly the same.

Glancing around the table, the cast of characters suddenly looked for all the world like it had been plucked right off Bay Street. The dealers who collect and track bets are gregarious, helpful guys, but generally no better at gambling than you or me, which makes them a lot like your stockbroker. They’re rooting for you, really they are, but mainly because bigger winners are better tippers, and that means more money for them.

The boxman, or table supervisor, is an older guy who sits in the middle of the action, wearing a nice suit, watching everything and saying nothing. This is vaguely reassuring because, hey, the guy with the nice suit is in charge. No funny business! In stock terms, he’s the market regulator. And just like a real regulator, he generally does nothing unless something truly outrageous happens.

But the strongest similarities are among the players in both arenas. Watching your average gambler in Vegas, it quickly becomes apparent that those global brokerages manage to build their fancy skyscrapers in Manhattan the same way the casinos fund their post-modern palaces in the middle of the desert. It’s all based on the innate human lust for money and deep disdain for math.

For example, people almost invariably increase their bets when they should be decreasing them. A case in point: on the craps table, the best odds of winning come at the very beginning of each game, during what’s known as the “come out” roll. But rather than seizing this opportunity, people often stand

ALTHOUGH casino odds are stacked against you, at least they’re stacked equally. In the market, it’s still easier to multiply your money if you have a lot to begin with.

around the edge of the table waiting to see a successful roll or two before they lay their chips down. By waiting, they significantly decrease their chances of winning—just as investors do when they wait to see if a company meets its earnings projections before buying its stock, or when they watch a stock from the sidelines until it has doubled and then bet that it will double again. In the stock market it’s known as chasing a winner, and it’s what gives us market bubbles, unrealistic valuations and sore losers.

In stocks, as in gambling, knowing when to step up and when to walk away is often what separates the pros from the suckers. Ask any decent financial adviser and they’ll tell you the most common mistake among small investors is that they hold on to their losing stocks too long. Ask any experienced

gambler and they’ll say the biggest flub on the casino floor is failing to cash out after a long winning streak. Both are symptoms of the same disease: letting your emotions rule your bank account.

Not that anyone would take responsibility for such mistakes. That just isn’t done. When things are going well at the craps table, “the shooter is hot,” but when things go south, “the table is cold.” This is reminiscent of all those mutual fund managers who, when they make a killing, are happy to bask in their clients’ adulation. But when they get crushed, they tell you they were caught in an

unavoidable bear market. “Not my fault, you see, the whole market was down.” Often, though, it’s not the market that generates losses, it’s sucker bets. Like the one I saw made again and again by a menacing-looking man with a Fu Manchu moustache and forearms the size of my thighs. Mr. Menacing put many, many chips on the “field bet” that night, and I had to feign surprise every time he lost. The field, as it’s known, is the classic sucker’s bet because it looks a lot easier to win than it actually is. If the shooter rolls a 2, 3,4, 9,10,11 or 12, you win. The trouble is, because it’s a twodice game, it’s a lot more likely that the shooter will roll a 5,6,7 or 8—and you’ll lose. On first glace the chance of winning looks like 64 per cent, but really it’s just 44 per cent. Translation: the more field bets you make, the more money you’re likely to part with.

I resisted offering this little math lesson to my oversized friend for fear he might not appreciate my generous impulse. After losing several more times in quick succession, he turned and said, “Man, this table’s cold.”

It is worth remembering, however, that there are a couple of key differences between casino gambling and investing in the stock market. The market offers far better odds to the smart long-term player. A casino, on the other hand, is more transparent. Although casino odds are stacked against you, at least they’re stacked equally for all. The same can’t be said for Wall and Bay streets, where it is still easier to multiply your money if you have a lot of it to begin with.

So, by now you’re no doubt wondering how Mr. Know-It-All did at the tables. Well, I must confess I’m as susceptible to flawed thinking and ill-advised bravado as any gambler. After six hours of playing at the US$10 tables, I walked away US$80 poorer. But, like Mr. Menacing said, the tables were ice cold. I was the victim of a bear market. ÏÏH

steve.maich@macleans.rogers.com