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Gambling, Probability, and Risk
Gambling, Probability, and Risk
Gambling, Probability, and Risk
1
A gambling experiment
Everyone in the room takes 2 cards
from the deck (keep face down)
Rules, most to least valuable:
Pair of the same color (both red or both black)
Mixed-color pair (1 red, 1 black)
Any two cards of the same suit
Any two cards of the same color
In the event of a tie, highest card wins (ace is top)
What do you want to bet?
Look at your two cards.
Will you fold or bet?
What is the most rational strategy given
your hand?
Rational strategy
There are N people in the room
What are the chances that someone in
the room has a better hand than you?
Need to know the probabilities of
different scenarios
We’ll return to this later in the lecture…
Probability
Probability – the chance that an uncertain
event will occur (always between 0 and 1)
Symbols:
P(event A) = “the probability that event A will occur”
P(red card) = “the probability of a red card”
P(~event A) = “the probability of NOT getting event A” [complement]
P(~red card) = “the probability of NOT getting a red card”
P(A & B) = “the probability that both A and B happen” [joint probability]
P(red card & ace) = “the probability of getting a red ace”
Assessing Probability
1. Theoretical/Classical probability—based on theory (a priori
understanding of a phenomena)
e.g.: theoretical probability of rolling a 2 on a standard die is 1/6
theoretical probability of choosing an ace from a standard deck is 4/52
theoretical probability of getting heads on a regular coin is 1/2
2. Empirical probability—based on empirical data
e.g.: you toss an irregular die (probabilities unknown) 100 times and find that
you get a 2 twenty-five times; empirical probability of rolling a 2 is 1/4
empirical probability of an Earthquake in Bay Area by 2032 is .62 (based
on historical data)
empirical probability of a lifetime smoker developing lung cancer is 15
percent (based on empirical data)
Recent headlines on earthquake
probabiilites…
http://www.guardian.co.uk/world/2011/may/26/italy-quak
e-experts-manslaughter-charge
Computing theoretical
probabilities:counting methods
Great for gambling! Fun to compute!
4 3
P (draw ace AND ace) x
52 51
Numerator: AA, AA, AA, AA, AA, AA, AA, AA, AA,
AA, AA, or AA = 12
52 cards 51 cards
12
P (draw 2 aces)
52 x51
Counting methods: Example 2
2. Ignore order:
# of pairs of aces
P(draw 2 aces)
# of different two - card hands you could draw
52 x51
Denominator = 1326
2 Divide
out
order!
6
P (draw 2 aces)
52 x51
2
Summary of Counting Methods
Counting methods for computing probabilities
Combinations—
Permutations— Order doesn’t
order matters! matter
With replacement
Without replacement
Without replacement
Summary of Counting Methods
Counting methods for computing probabilities
Permutations—
order matters!
With replacement
Without replacement
Permutations—Order matters!
Permutations—
order matters!
With replacement
Permutations—with replacement
With Replacement – Think coin tosses, dice, and DNA.
“memoryless” – After you get heads, you have an equally likely chance of getting a
heads on the next toss (unlike in cards example, where you can’t draw the same card
twice from a single deck).
What’s the probability of getting two heads in a row (“HH”) when tossing a coin?
Toss 1: Toss 2:
2 outcomes 2 outcomes 22 total possible outcomes: {HH, HT, TH, TT}
H
H
T
H
T
T
1 way to get HH
P( HH ) 2
2 possible outcomes
Permutations—with replacement
What’s the probability of 3 heads in a row?
Toss 3:
2 outcomes
Toss 2: HHH
2 outcomes H
Toss 1:
2 outcomes
T HHT
H
T
H HTH
H T
HTT
T H H THH
T
T THT
H
1 TTH
P( HHH ) 3 T
2 8 possible outcomes
TTT
Permutations—with replacement
When you roll a pair of dice (or 1 die twice),
what’s the probability of rolling 2 sixes?
1 way to roll 6, 6 1
P (6,6) 2
6 36
the # of events r
(# possible outcomes per event) n
Summary of Counting Methods
Counting methods for computing probabilities
Permutations—
order matters!
Without replacement
Permutations—without
replacement
Without replacement—Think cards (w/o reshuffling)
and seating arrangements.
.
.
.
Permutation—without replacemen
Seat One: Seat Two: Etc….
5 possible only 4 possible
A
A
B
B
C …….
D
D E
E A
B
C
D
# of permutations = 5 x 4 x 3 x 2 x 1 = 5!
5! 5!
5!
(5 5)! 0!
Permutation—without
replacement
How many two-card hands can I draw from a deck when order
matters (e.g., ace of spades followed by ten of clubs is
different than ten of clubs followed by ace of spades)
52 cards 51 cards
. .
. .
. .
52!
52 x51
(52 2)!
Summary: order matters,
without replacement
Formally, “order matters” and “without
replacement” use factorials
(n people or cards)! n!
(n people or cards r chairs or draws)! (n r )!
or n(n 1)(n 2)...( n r 1)
Practice problems:
1. A wine taster claims that she can distinguish
four vintages or a particular Cabernet. What
is the probability that she can do this by
merely guessing (she is confronted with 4
unlabeled glasses)? (hint: without
replacement)
2. In some states, license plates have six
characters: three letters followed by three
numbers. How many distinct such plates are
possible? (hint: with replacement)
Answer 1
1. A wine taster claims that she can distinguish four vintages or a particular
Cabernet. What is the probability that she can do this by merely
guessing (she is confronted with 4 unlabeled glasses)? (hint: without
replacement)
P(success) = 1 (there’s only way to get it right!) / total # of guesses she could make
Total # of guesses one could make randomly:
= 4 x 3 x 2 x 1 = 4!
263 different ways to choose the letters and 103 different ways to
choose the digits
Combinations—
Order doesn’t
matter
Without replacement
2. Combinations—Order
doesn’t matter
. .
. .
. .
52 x51 52!
2 (52 2)!2
Combinations
How many five-card hands can I draw from a deck when order
does not matter? 49 cards
48 cards
50 cards
51 cards
.
.
52 cards .
.
.
. .
.
. .
.
.
.
.
.
52 x51x50 x 49 x 48
?
Combinations
1.
2.
3.
….
How many repeats total??
Combinations
1.
2.
3.
….
i.e., how many different ways can you arrange 5 cards…?
Combinations
That’s a permutation
without replacement.
5! = 120
52 x51x50 x 49 x 48 52!
total # of 5 - card hands
5! (52 5)!5!
Combinations
How many unique 2-card sets out of 52
cards? 52 x51 52!
2 (52 2)!2!
n
n!
r (n r )!r!
Examples—Combinations
A lottery works by picking 6 numbers from 1 to 49.
How many combinations of 6 numbers could you
choose?
49 49!
13,983,816
6 43!6!
5 5!
10
3 3!2!
Summary of Counting
Methods
Counting methods for computing probabilities
Combinations—
Permutations— Order doesn’t
order matters! matter
With replacement: nr
Without
replacement:
Without replacement: n n!
n(n-1)(n-2)…(n-r+1)=
r (n r )!r!
n!
(n r )!
Gambling, revisited
What are the probabilities of the
following hands?
Pair of the same color
Pair of different colors
Any two cards of the same suit
Any two cards of the same color
Pair of the same color?
P(pair of the same color) =
# pairs of same color
total # of two card combinations
4! 4 x3
number of different possible pairs of aces 4 C 2 6
2!2! 2
4! 4 x3
number of different possible pairs of kings 4 C 2 6
2!2! 2
...
13x6 78 total possible pairs
78
P(any pair) 5.9% chance
1326
Two cards of same suit?
13!
Numerator : 13 C 2 x 4 suits x 4 78 x 4 312
11!2!
312
P(two cards of the same suit) 23.5% chance
1326
Two cards of same color?