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Students

On the cards

Open-access content Wednesday 7th October 2020
Authors
Adeetya Tantia

Gamblers could tell us a lot about how risk-seeking people view insurance, argues Adeetya Tantia

On the cards

There are plenty of reasons why gambling and insurance are different, from the nature of risk to the concepts of insurable interest and undesirability of the event happening. However, there is a concept of ‘insurance’ in certain games such as blackjack and poker – although it is really hedging risks in certain qualifying circumstances. I will refer to it as a ‘side bet’.

In blackjack, if the dealer has an ace as his up-facing card, the player can place a side bet of up to half of their original wager with a payout of 2:1 if the dealer has a natural blackjack. The calculated probability of the dealer having blackjack is ~30.7% in a single deck situation, so the bet actually has a negative expected value. And, in practice, the concept of this side bet hasn’t been taken advantage of unless the player is a card counter and knows when the probabilities tip over in the side bet to have a positive expected value.

There are some obvious questions here – why would a gambler, by nature a risk-seeking person, take a side bet that will reduce the risk? When do gamblers take such a side bet? If the pricing of the side bet was a more accurate reflection of the risk, would gamblers use it more often?

This is where innovation is happening on some online betting platforms; their experiments could lead us to a better understanding of how gamblers understand and evaluate risk, as well as teach us about the risk averseness of generally risk-seeking people. Online betting casinos can theoretically calculate the actual risk value of the side bet in real time – at which point, if offered at the risk price, every player would take the bet. Is there a line in between, though? What if the casino experiments with different margins on top of the risk price but, at the same time, is completely transparent about said margin?

Insight from such experiments could lead us to an understanding of what people think is a fair margin for this side bet. This could allow us to understand how the individual is making decisions, given such a bet. Another possible experiment would be to set the side bet such that, if you won the bet and lost the main bet, you could actually make a smaller percentage of profit on the transaction instead of just breaking even. All of these could answer questions about how risk-seeking people evaluate risk.

Let’s go to poker, which is considered to be more skill-based. One online casino offers ‘All-In Insurance’ – again, not technically insurance. In the flop or the turn, if you are the favourite to win the pot, you can place a side bet: that the set of cards coming up as the flop or the turn will benefit your opponents. If a card comes up that benefits your opponent, you win the side bet. This particular online casino offers what seems to be the exact risk pricing for this side bet by being extremely transparent about it, both on its website and during gameplay. As this is technically avoiding a ‘bad beat’ outcome for the player, offering a risk pricing seems fair, given that the player has no control over the cards dealt. Could this be a good way to remove the luck factor from other partially skill-based games? And how would gamblers react to it, given that they are generally risk-seeking in nature?

These online betting casinos could be an easy way to study risk attitudes and decisions involving financial loss and gain. With a broader focus on behavioural decision-making, understanding how humans make decisions in special circumstances such as gaming could lead to important insights.

Adeetya Tantia is a guest student editor

October 2020
This article appeared in our October 2020 issue of The Actuary .
Click here to view this issue

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