There's no problem so big, that a natural nine can't solve.

Got volatility?

Published Monday, March 24, 2008 by baccarat_king

An interesting article published a few years ago by Andrew MacDonald & William R. Eadington is one of the few available that discusses high stakes baccarat.

They have a rather fascinating discussion of volatility, the law of large numbers, and fear of the unknown; and how this all relates to the high stakes baccarat business. They go on to explain "Extending this, there is about a 95 percent chance the player will end up within two standard deviations of the expected result (between 75 units behind and 51 units ahead), and a 99.7 percent chance he will end up within three standard deviations of the expected outcome (between 107 units behind and 83 units ahead)."

Upon first glance --- you figure, yeah, I knew Baccarat was not particularly volatile for the casinos... but, what many don't figure in their analysis is the often perverted (and excessive) table limits that need to be offered to the baccarat whales. While "normal" games will often have a maximum bet of $5,000 to $15,000 --- the "whale" table limits are what make it such a volatile business. (These maximum bets often exceed $100,000 per hand)

As they go on to say "Thus it is very rare that outcomes are beyond three standard deviations. However, if one unit is $150,000, the “unlucky” outcome for a casino with our hypothetical baccarat player at the two standard deviation (95 percent confidence) level would be a player win (or casino loss) of 51 units, or a rather painful $7.65 million (before expenses)!"

In addition, you have the problem with the limited number of decisions (or hands) played by the high end baccarat player. As we all know, more hands (or spins on a machine) equal less "sweat" for the house. But, with baccarat, a shoe (with only around 70 decisions) can take up to 3 hours in high end big baccarat play. This small number of hands coupled with the über high maximum bets is a volatility disaster.

"At a 1.2 percent house advantage, a maximum bet of $250,000 played for 1,000 hands will result in an expected win of $3 million but (within two standard deviations) will vary between a loss for the casino of $12.5 million and a casino win of $18.5 million in 95 percent of occasions."
HOLY VOLATILITY BAT-MAN!

We are going to continue this discussion and looking at why the RIO got out of the high-end baccarat business, when the propellor heads at Harrah's purchased the property from Marnell in 1999.

In an effort to blog on a more consistent basis; I'm going to be setting out an agenda for each week (every Sunday or Monday).

So, this week's agenda will include :

- continued discussion of big baccarat and volatility
- brief history of the RIO Casino, the purchase by Harrah's, and the end of high stakes baccarat at the RIO
- a look at the Palazzo Suites (at RIO) built for the high stakes baccarat royalty

and just in time for the new movie release, we will look at the new movie "21!"

but, take a trip back to the "original real deal blackjack team" --- yeah, NOT the MIT Blackjack Team --- but the "wandering Jew" and his crew in the 1970's.

Labels: 21 movie, baccarat, big baccarat, high stakes baccarat, las vegas, mit blackjack team, palazzo suites at rio, rio, wandering jew

1 Responses to “Got volatility?”

Brian on 1:30 PM

Just wanted to clarify that the significant bit here is the size of the standard deviation and not the percentages. Roughly 95% within 2 S.D. and 99.7% within 3 S.D. is true for all standard deviations.
Great blog! Came here from your FT sig.

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