Tuesday, October 25, 2016

Book Review: The Perfect Bet

I am sure that you, like me, have been told that investing in the stock market is little more than gambling. Well in his book 'The Perfect Bet: How Science and Math are Taking the Luck Out of Gambling" Adam  Kurcharski looks at the history of ideas such as probability theory, chaos theory, mathematics and even the building of atomic bombs have led to changes in betting and in how modern stockmarkets work.

book cover the perfect bet how science and  and math are taking the luck out of gambling by Adam Kucharski
The Perfect Bet

I personally do not agree that investing is a form of gambling there are too many differences in the ideas of the two motivees. Gambling and investing do have similar intangible links though, they both involve markets and as such you are playing a role in their movements. The second is that you are playing on your information against everyone else in the market playing with their information.

Kucharski is a wonderful writer and explains a complex situation very well, a mathematician and statistician himself he draws on history and a broad knowledge of many intertwined disciplines, including physics, mathematics, economics and computer science.

Though the main thrust of the book looks at several gambling systems including blackjack card counting, horse racing, and roulette systems. He points out flaws along the way but extracts the golden nuggets of fact based ideas that they produce. So for instance card counting does work, but it is time consuming to build a knowledge system that allows you to make the system pay with multideck dealing and limited betting practices to not draw attention to the fact you are card counting.

But then he turns to other areas of the gambling idea. Trying to beat the house is nigh on impossible, like beating the market in investing. But the weak link in the houses chain and in the market is that players, investors, punters or marks play at different levels of skill and with differing levels of information.

There is the investors strength, bringing together knowledge both of the market and the players in the market leads to arbitrage situations. The point where one stock or one side of the bet is skewed. That is where the skilled gambler and investor can step in to buy. That is The Perfect Bet.

This book is a solid read. I enjoyed reading it from cover to cover in just a few hours. It is similar to  A Random Walk Down Wall Street  In that psychology plays a huge role in outcomes, but Kucharski  then looks at robots and time which adds even more complication to strategies which are employed. So here he moves from gambling to the stock market. There we face the ever growing influence of automated trading. Both the stock market and gambling markets are at the mercy of the arbitrage robots. Bots can be looking and dealing with millions of trades per second. In the time it takes you to blink a bot will have dealt in thousands of trades, you cannot even hope to beat a bot that is on an arbitrage deal.

So in conclusion this book might seem to be merely about gambling systems and their mathematical histories, but it is a worthwhile read for any investor in the stock-market too. If only to see why you cannot win in the short term arbitrage trade.  Read what others say about 'The Perfect Bet.'