This video was made possible by Squarespace. Build your beautiful website for 10% off at

squarespace.com/Wendover. According to conventional economic rules,

casinos shouldn’t be able to exist. That’s because conventional economic rules

assume humans are rational. Conventional economic rules would predict

that, if someone offered you a deal where you gave them $100 and they gave you $94.80

back you wouldn’t take that deal but for some strange reason, perfectly intelligent

people head to the roulette table every day and, in essence, take that exact deal. Just look: an American roulette table has

38 numbers on it—double-zero, zero, and one through thirty-six. The best odds on the table are in the red,

black, even, and odd boxes. If you put a $5 chip in the red box, for example,

and the ball falls on a red number you double your money, you gain $5, but of course the

ball can fall on zero or double zero which are neither red nor black and, for these purposes,

neither even nor odd. Now, if the zero and double zero didn’t

exist then playing roulette would make perfect sense. If you came in with $100 and played infinite

times you would leave with $100 because it would be a 50% chance of doubling your money

each time. In reality, because of those zeroes, the odds

of doubling your money are actually 47.4%. That means that for every dollar you play

you can expect to lose 5.2 cents but for some reason people still do it while this small

gap in between fair odds and the odds casinos and other gambling institutions offer earn

them worldwide close to half a trillion dollars per year. But consider this. For the same reason gambling shouldn’t work

insurance also shouldn’t. Insurance is essentially the exact opposite

of gambling. Insurance companies are basically gambling

companies but the roles are flipped—the insurance companies are the gamblers and you’re

the casino. If you pay a car insurance company, for example,

$1,500 a year to insure your vehicle they’re gambling that you’re not going to cause

more than $1,500 in coverable damage in any one year but of course it takes money to run

the insurance company so they need a margin. MetLife, one of the world’s largest insurance

companies, for example, takes in $37.2 billion from the people who hold insurance policies

with them but then pay back in insurance claims just $36.35 billion. Of course there are other sources of revenue

and other expenses at MetLife but just looking at the balance between what comes in and what

goes out for insurance the odds are pretty decent compared to the roulette wheel. For every dollar you give them you can expect

to get about 97.7 cents back but that’s still that’s losing money. According to the same conventional economic

rules that say that casinos shouldn’t be able exist insurance companies too just shouldn’t

work as a concept because people get back less than they put in but here’s why they

do. Just consider this: would you rather, with

100% certainty, receive $5 or would you rather have an 80% chance of receiving $6.25. Feel free to think about it for a second but

chances are that you said you’d rather have that sure $5. When surveyed with this question over three

quarters of respondents said that they wanted the certain $5 over the 80% chance of $6.25. But here’s the strange thing: these two

options are worth the exact same amount. If you took the 80% gamble infinite times

you would receive an average of $5 each time as 80% of $6.25 is $5. Therefore, in theory, people should have no

preference between these two options because they’re worth the exact same amount. But here’s the thing: people, in general,

dislike losing a given amount of money more than they like winning it. That is, the negative effect of losing $5,

for example, is greater than the positive effect of winning $5. Because the second option comes with the chance

of loss, which is a negative experience more powerful than the positive experience of certainly

gaining $5, this option is worth less overall even if it’s worth the same in a dollar

amount. This is why insurance works. Insurance is a worthwhile gamble for the insurance

company since the odds are in their favor and they make money while the gamble is worth

it for you because the monetary amount you get back plus the absence of monetary loss

makes the deal worth more than the money you put in overall. Of course it is a bit more complicated than

this since insurance companies often have preferential rates for healthcare and it helps

smooth out economic shocks so, despite being a gamble, it is absolutely worth it in most

cases but insurance, at it’s most basic level, is loosing to avoid loss. This principle of hating losing can be used

to make the same amount of money worth more. In one experiment 150 teachers in Chicago

Heights were split up into three groups. One group received nothing, one was told that

they would receive a bonus at the end of the year corresponding to how well the students

test scores were, and the third group was given the exact same deal for a bonus with

the only difference being that they were given the bonus payment upfront at the beginning

of the year and told that they would have to pay back the corresponding amount if their

students did not score the test scores necessary. The group that was promised the bonus if test

scores improved performed largely the same as the group offered no bonus but, the group

given the bonus up-front overall performed much better with test scores improving up

to 3 times as much as the traditional bonus group. It’s clear that the fear of loss is far

more powerful than the promise of gain so this explains why insurance works but, for

this same reason, gambling still shouldn’t work but something interesting starts changing

when you change the odds. Now, remember that three quarters of people

preferred a sure $5 to an 80% chance of $6.25 but now think whether you’d prefer an 100%

chance of receiving $5 or a 25% chance of winning $20. Once again the options are worth the exact

same amount since 25% of $20 is $5 but, with this change in the odds, those surveyed on

average had no preference between the two options. Half preferred the sure $5 and the other half

preferred a 25% chance of $20. But let’s change the odds again. Would you prefer an 100% chance of receiving

$5 or a 0.5% chance of winning $1,000. Still with these numbers 0.5% of $1,000 is

$5 so the two options are worth the exact same amount but, with these options, for the

first time people prefer the gamble. Only 36% of respondents said they would take

the $5 while 64% preferred the half percent chance of winning $1,000. What we’ve begun to understand is that humans

like low-probability risk. We like a small chance of winning big over

a certain gain. In fact, you can see this at the racetrack. The best horse might have 2/1 odds where you

get $3 if they win for each dollar you bet while the bottom might have 200/1 odds where

you get $300 if they win for each dollar you bet but, as it turns out, on average, the

chance of the top horse winning is actually better than 2/1 and the chance of the bottom

horse winning is worse than 200/1 because people prefer betting on the underdog which

inflates the odds. You could therefore make more money betting

on the horse that’s likeliest to win. Crunching the betting data from 8,000 tennis

matches it was found that the bets on the best athletes with the best odds actually

made money on average with 103% of the money won back while the bets on the worst athletes

with the worst odds won just 81% of the money back. Evidence for this phenomenon has been found

time and time again but the question of why we do it is tougher. The simple answer for why this is is that

people overweight the impact and chances of extremely low-probability events. This has been used to explain why people are

so afraid of terrorism and plane crashes despite the chances of dying of either being monumentally

small. It really doesn’t matter if you know that

the odds are not in your favor like with the lottery or in the casino. People still love risk if it comes with large

returns and this is why gambling works as a concept. Everyone just has some arbitrary point where,

given two options with the same value, they’ll start accepting the risk over the sure money. What that means is that in a gambling transaction

with someone who bets and someone who accepts the bet both parties actually find what they’re

doing worthwhile. The casino finds what they do worthwhile because

they make money while the bettor finds what they’re doing worthwhile because they have

the possibility of winning lots of money. Now, the explanation for why people prefer

these low-probability bets moves further away from economics into psychology but one explanation

with the lottery, for example, is that a bet doubling one’s money does little to change

one’s quality of life but, a bet multiplying a person’s money by a factor of thousands

can be truly life-changing so people are betting for monumental change rather than for another

cup of coffee. To summarize, what this all means that a 5%

chance of $100 is worth more to most people than $5 despite both having a monetary value

of $5. Therefore, by offering gambles people can

make money more powerful. Almost everywhere in the world there is an

issue of low-savings rates: people don’t put enough money into banks. About half of Americans could not immediately

come up with $2,000 if an unexpected expense came up according to one survey. A big reason for this lack of savings is that

banks are not incentivizing enough. With how tiny savings accounts’ interest rates

are many people just don’t see a reason to put their money in banks and banks are

unwilling or financially can’t increase their interest rates so how do you make the

same amount of money go further? You turn it into a gamble. Economists created a concept for what’s

called a “prize-linked savings account.” A normal savings account with $2,000 in it

at a bank that offered 1% annual interest would earn $20 a year but, with a prize-linked

savings account, instead of being given the $20 in interest it would be entered into a

gamble with, for example, a 0.4% chance of winning $5,000. As always that gamble is still worth $20 monetarily

but to the gambler it’s worth more. These prize-linked savings accounts have been

incredibly successful so far at getting people to save. In Michigan’s trial of the system 56% of

those using it were first time savers. These same principles are the ones that make

lotteries work. In fact, lotteries are just such easy ways

of making money that in many countries privately runs lotteries are illegal. In the US, for example, all lotteries have

to be state-run and their profits usually go to funding education. Because the states are guaranteed to make

money from the lottery it is essentially a form of taxation. In fact, all forms of gambling are set up

in a way that they’re guaranteed to make money for whoever’s running them. In a casino, at the racetrack, or with any

form of gambling it’s never a good deal for the bettor but, the reason why people

engage in these deals is a fascinating study of behavioral economics and its principles,

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I just would do the certain chance of the 5$ so I wouldn't have to carry around the $.25 in change

“Small chance of winning big?” What about losing big?

Shouldn't 0 and 00 count for even on roulette? 0 is an even number.

lottery is just a fancy word for stupidity tax…

What a Rad Freaking Video!! I like all yours but that one was The Tits!

Ok, say person 1 has $1m and person 2 has $40m. A coin toss is proposed. If person 1 wins he will get $1.25m & if person 2 wins he will get $1m. The person with $40m won't really be affected if they lose but the person with $1m will be broke. Thus, factors other than odds are at play. here.

Same in car insurance. Being uninsured might cost you say $50k in total car repairs if you crash into someone. This is a significant sum for most. Thus, paying $1k for insurance is seen as worthwhile even if it is most likely a money loser.

I don't really understand how the math behind the infinite rolls works. If one has $100 and plays roulette with a 50% chance, it only takes one fail to lose that $100. How is it made back? How exactly is the value gained/lost calculated?

It would also help to see a more in-depth explanation about how an 80% of $6.25 is equal to a 100% chance of $5.

you gambled on weather or not i would like this video…I did

People picked the 100% chance to win a $5 option because you left out the part about an infinite number of tries.

"In a casino, at a racetrack, or with any form of gambling it's never a good deal for the bettor" COMPLETELY FALSE

1. Legal means could include: holecarding, card counting, shuffle tracking, ace sequencing, matched betting, bonus hunting etc.

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Just completely wrong statement basically

Great video! I hadn't heard about the lottery savings accounts before. Neat concept!

You didn't mention games of skill like poker that are also found at casinos. There, it can be a profitable endeavor for the player… although the vast majority of players are still losing players, and the house is taking a cut.

Insurance is viable because the utility of money is not linear. Most folks would be homeless if they had a bad wreck and had to pay the medical bills. It is worth sacrificing expected value to be sure to avoid a scenario that ruins your life. On the other hand, a millionaire probably should shun insurance if his state allows him to do so. Of course, if you drive like I do, insurance is always the +EV move.

Wow, that was some really bad math skills you showing everyone. worth the exact same amount?? LMAO on that one. Plus how did you forget about the Deductible with insurance?? Back to school for you. You need to go.

Engineers like numbers… but those numbers never factor in the human cost. The lottery thing about it being "good", when you see people playing like $85(daily) to win $5(daily)… especially seniors. You will start to see the real world factor of "addiction".

My favorite game is the one they have at the bank. You put your card into the machine and press a button and money comes out every time. Best game by far.

This is whh poker is best. You are playing another peraon not the house

"conventual economics believes humans are rational"

and that's why conventional economics is thick

insurance works because humans don't live infinitely and the variance in the outcomes in a finite number of bets can be significant.

You shouldn't have made this video. You clearly aren't qualified.

I would just like to say that according to traditional economic rules casino could exist. Someone isn't juste offering you a bad deal, but sells you an experience, a good time. So the pleasure you take in gambling justifies the bad deal you get from the house

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the idea of a prized based savings account disgusts me on a personal level

What this video touched upon for only 2-3 seconds is the concept of marginal value. It's the determining factor for a lot of these gambles and why people overwhelmingly prefer certain odds of similar value. Most people will always choose a 100% to get 100,000,000$ over a 10% chance to win Several Trillion, despite the Trillion deal having much higher EV.

buying a AWP in CSGO is basically gambling if you win the round like 2 times you get money back if you die ur enemy can take the AWP and kill ur team

And that's why the riskiest game I play is blackjack

Everyone: You can't loose money while running a Casino.

Trump: Hold my wall.

this is only true when you get the choice between $5 (100% chance) and $1000 (0.5% chance) an infinite amount of times. In most cases, you don't get this choice an infinite number of times and if you get the choice only once, then its a decision between $5 and $0.5, so it's pretty easy to choose now.

Well.. I don't get this concept of 100% chance of $5 being equal to 80% chance of $6.25.

The chance is a percentage of probability to win against others. Not the percentage of value of the money.

Can someone explain? Because at no point there is a probability of winning $5, it is always $6.25. So both amounts are never equal.

On may 5th, I woke up at 5 am. I had been dreaming of the number 5 all night. I had the 5 dollar special at the diner for breakfast. I filled my car up with gas, it topped off at exactly 5 dollars. I said I have to go to the race track, it was 5 miles away. I got there at 5pm, just in time for the 5th race. I bet 5 thousand on the #5 horse.

Sure enough, she came in 5th.

am sorry but the math is wrong. 100% chance to get $5 you can run that 100x and still get $5 each times. 25% chance of getting $20 doesn't mean you'll get the $20 after certain times but actually you get 25% chance each times you might get $20. So the math is not the same.

1. insurance it not a pure paying and giving calculations for most cases. If i buy a car, i might bot have the money to buy another one within the next 10 years. So its more like a credit where i pay interest regardless of me actually getting the money.

2. If i play the lottery, a large part of the value received, is dreaming about what I could buy if I won. And this value has to be included in the calculation. It’s basically like a cheap movie ticket where I for a few hours am introduced to an imaginary world where I’m a billionaire, rather than an imaginary world created by some movie director

Lol i thought the banking thing at the end was gonna be a sponser

A ton of useless information.

Umm…. pretty sure you messed up the horse betting odds. If you put up $1 with 200/1 odds you win $200 so the payout is $201. Not $300…

I wish I could live in New Zealand were insurance isn't mandatory

I never understood it honestly.

I've had the privilege to walk through Monaco, Macau and Las Vegas and I saw the same things.

Huge fancy halls filled with slot machines, or gambling tables of varies kinds. There's expensive carpets, chandeliers, majestic architecture and gardens.

Often times even free food for gamblers.

After putting 2 and 2 together one should come to realize that gambling is ridiculously lucrative for the house.

All this has been built using gambling money. How can anyone feel comfortable walking into and spending money to a business like that?

It baffles me.

nobody :

Wendover Productions: 7:33 planes

STONKS

Introducing premium bonds in the U.K.! oh wait it’s been around for years

Private lotteries being illegal is the perfect example of how we are the slaves and the government is the master. "Do as I say, not as I do you pathetic, ignorant mutts!" That's my evil Gov't impression.

Gambling itself is pure magic especially after hard day at work.

The fact that surprised me most was: "About half of Americans could not immediately come up with $2,000" … Very sobering.

Humans are dumb

Economics is more complicated than quantum mechanics…

So, while I understand what was said, I can't relate to the phenomenon you are describing. You claim that "everyone just has some arbitrary point, where, given two options with the same value, they'll start accepting the risk over the sure money". In my own experience, as the chance of success diminishes and the reward increases, I become increasingly disinterested with the gamble. I suppose the aforementioned statement is true in the sense that I would shrug my shoulders in indifference given a choice between a 100% chance of getting $5 or a 99% chance of getting $5.05, since the potential negative reaction to the 1% chance loss is unlikely, and thus not worth the effort made to make a choice.

squarespace sucks

Funny, I'm the exact opposite.

I'd take the 80% chance at $6.25 over the 0.5% chance at $1000 any day.

I would propose a completely different explanation of your example about giving someone 5 dollar.

Because 80% chance for 6.25, requires 1) trust that you are honest and fair in how you come to this 80% and 2) it costs effort.

Getting 5 dollars straight up, doesn't require any trust. You just give it to me. It also requires less effort. 5 dollars is simply of such low value, that people don't really care. And because people don't really care, they also don't want to put in the effort. The effort simply doesn't outweigh the gains.

But looking at thins from a statistic perspective, doesn't really make sense to begin with. Because no one is exactly the average human, nor does one play an infinite amount of times. Like that, everyone thinks, and wants to think, they will stop after they have won. They however don't see and feel the psychological effect of addiction kick in. So it's not a statistical problem, it's a psychological problem. Because doing things that make statistically no sense, can still make sense when you take other factors into account.

Why do I have a military intranet. Is that connected to the server at 217 George St. & If your being paid what is the transaction.

.0001 percent chance of winning 500k

This one dude has fifty channels, I get it, monetize monetize monetize but maybe you could be a little transparent when you have the same ad running on twenty different channels by the same voice. I get it, you dont like youtube's policy, going around it doesnt solve it

No, the odds are the same for every bet on the roulette wheel.

May the odds be ever in your favour.

If the 0 and 00 didn't exist and you came in with $100 and played infinite times, wouldn't you leave with $0?

I’ve made $100,000s playing roulette for 1 simple reason – the Casinos cheat & I know how. Every # on the TABLE has an electrode that measures how many chips are on each number for each spin. There is only ONE reason this – so that’s how you win at roulette – you’re welcome 😎

It's easy: the gambler is paying for the entertainment value. The chance of winning big is a lot more entertaining than the chance of winning $20.

The thing is, it counts as entertainment. If you're having fun gambling, that's where the extra money is going

the thing is that a "i win $5 100% of the time is only equal to "I win $20 25% of the time" if the $20 25% of the time is 4 times

insurance is the same of the casino as in expected value but people buy insurance (when non mandatory) cause the effects on their net worth could be more dramatic if the event occurs than if the event does, depsite the fact that in the long run they shouldn't. it's not that they're irrational, especially if they know that they will "act" irrational in front of the pain of a loss. on the other hand, when you play a game with negative expected value at the casino, you're aware that losing 5% on average is greatly surpassed by the joy brought to you when you double or triple your bet (despite the fact that your wallet is lighter).

in the 80% at 6.25 vs 100% at 5, the certain is preferable bc you're not going to run the bet an infinite amount of time in real life. it would have been more interesting if the uncertain event had a slightly higher EV, a risk premium so to speak…

You have a 80% chance of getting $6.25, while the other 20% chance of getting nothing. You’re not getting 80% OF $6.25. Why would you get $5 as an average from an infinite number of tries of you did not mention other chances of getting other values?

Selling drugs sounds like the best gamble after hearing this.

Awesome job.

Yes I can type without looking

The thing about insurance is while yes, were you to have infinite money and live forever getting insurance would lose you a small ammount of money per year, compared to the risk of actually crashing your car; people have neither of that or infinite life, so it CAN make logical sense to get insurance.

1:00 I get the point but this is just plain wrong. If you start a fair game of roulette without 0 and 00 and play an infinite amount of times, you will leave with $0.

As Trump said: Dont be a gambler, better if you own the casino itself.

Your explanation about lack of saving is incorrect, America might have a problem with people saving to little (in all honesty I am not convinced, but I am to lazy to get my books and look up the statistics), but most other developed countries (especially countries in (western) Europe (Eurocountries) and Japan) have a problem with people saving to much and not investing enough in the economy. This has lead to economists debating whether or not some economies are in what is called a liquidity trap (Keynes), meaning people save so much money and invest so little that interest rates do not have much affect anymore on the economy. This has lead to interest rates getting negative in the EU, which means that if commercial banks want to put money in an account with the ECB they have to PAY (instead of receiving) money to be allowed to put the money there (so imagine you go to the bank and you ask the bank to put your money on a savings account and the bank replies with "all right but you know you have to pay 0.5% every month to be able to put the money on an account here", and as absurd as it sounds that is one of the measures the ECB has taking to encourage commercial banks to give loans to people so they can invest and help the economy), the high savings of people has also lead the ECB to start with quantitive easing etc (which the Fed has also done in America by the way to stimulate people to invest and help the economy).

Meanwhile I was like "yeah id take the 80% bet and just take the sure 5$ in the other two options"

The blackjack dealer in GTA actully pulls cards out of his pockets .-.

The 25 cents is probably going to be lost in my pocket so it's actually just 6 dollars

I would take the safe option because I don't get to do the experiment infinite times

Your thumbnails look awesome

Okay but the $5 and $6.25 thing excellent actually even because you don't get to take it an infinite number of times you don't get to take it once so people don't think that way. People either want a guarantee of an extra $5 one time or are happy with not getting anything or more likely getting an unexpected $6.25. And with how that is structured you aren't losing $6.25 you're only need not gaining an unplanned for $6.25

back to gambling on gtai go8:19 Its Behavioral Economics bro, which combines economics, psychology and probability.

Expected profit/loss makes sense in stats theory but not in the real world because you know you have to live with the results.

Just prospects theory.

Lotteries fall in a different category. For $2 buy in on a 500m lotto, you get to enter a drawing that if won, equals generational wealth.

This is interesting to hear. I learned a lot about gambling.

Lmao if it was a one time thing then I would obviously choose the 80% chance of $6.25

Lotteries are taxes on stupidity and insurance is a scam

There is also the whole government forcing you to have insurance thing.

if i could choose not to pay insurance, i would choose that opttion, unfortunatly its the law that you MUST have insurance.. sooooo yeah

There are so many oversimplifications and incorrect definitions in this video. Suggest that you familiarize yourself with "expected value", "utility", and the time va,ur of money and then revise / rescript.

Sounds like what EA, Activision, and Rockstar/Take2 been doing for the last few months

Lottery money goes to education? Then how will they make sure people say stupid enough to play it?

I was in a casino once, just for fun

I won about 150 CHF^^

But this was the first and only time, I went to a casino^^

I don't think the $5 example works. There's value to reducing risk. It is completely rational to prefer the lower risk, all else equal.

The more risk, the bigger the required payoff.

Expanding everything to infinity is not reality, so why talk with in terms of it.

Let's not forget that the odds for winning the lottery jackpot is around 1 in 45 million, and if you buy 2 tickets, the odds become around 1 in 22.5 million, for a small price. so people are more likely to buy 2 tickets.

"Finally a video without planes!"

7:30"Oh, God dammit!"

Money market funds and mutual funds are where it’s at. Don’t fool with savings accounts

Good going

Will aviation be wrapped in this video somehow

I rarely downvote, but this simplification of insurance is nonsense. If my losses could destroy me, removing my ability to meet the opportunity costs for recovering, but the premiums are manageable, then the insurance is worthwhile. Only the wealthiest entities (such as New York City) can self insure.

5 dollars is equally to a 5 percent chance of 100 only if the bet is done multiple times. The whole point is it's a one time thing

this video states odds of 200/1 gives you 300 back for every dollar bet. but its actually only 201. i wouldnt want to be the videos author if im paying out 50% above the odds.

This seems to prove that people are not rational, at all

Gambling itself is a kind of magic!

I like your channel so I'm a little surprised that you made a video I have so many issues with

0:18 – no they do not make that exact deal. They would be if something you assumed a bit later was actually true: that they had an infinite number of trials, but since that's not true your statement is illogical. On average over trillions of attempts by millions of people, people lose 5 cents on the dollar, but individuals only take a ridiculously small fraction of those attempts. The smaller the sample size the higher the variation, so people are actually betting that the variation will be in their favor.

1:22 – the reason people still do it is, besides the reason I mentioned earlier, because it's fun. It's entertainment, and the 5 cents on the dollar people lose on average is essentially the cost of admission for this grown-up amusement park

1:36 – insurance shouldn't work. At least in the form that it does. It "works" how it does in the US because not having insurance is literally a criminal offense

2:25 – even ignoring the first thing I said, people who want insurance don't want it to make money. They want it to prevent too much loss at any one point in time. With insurance there's only so much you're liable for until the insurance company has to pay for everything, so if you royally screw up and t bone some guy's million dollar Lamborghini, you don't have to come up with a million dollars all of a sudden and go bankrupt. Even ignoring that, people use insurance for the same reason people buy cars on payment plans despite it literally costing more money: it amortizes the cost. If something unrelated and drastic happened that cost you a lot of money, and now you lost a bunch more money to pay for some accident not covered by insurance, you could get hit with too much at a single point in time and go bankrupt as well.

2:42 – again, the two things are not the same, but not because of the negative effects of losing or whatever, but because there is not an infinite number of trials but instead only one. You even said at 3:13 your theory relies on an infinite number of trials, which isn't the case in the real world. How could you miss something so obvious

7:29 – terrible explanation. The real reason is because the amount of reporting the media does on, say, terrorism, is astronomically high in proportion to the number of people who actually die of it. With plane crashes it's the same deal, but made even worse by the fact that you're trusting your life with an extremely complex machine when you have no clue how it works

9:23 – this is a bit, well, petty, but this is also not true. You're losing money here due to inflation