America at the Craps Table

It has struck me as of late of how much focus is placed on a rising stock market. There is an equal amount of cheerleading focused on the economic recovery. Before I continue, I want to get a few disclosures out of the way. High unemployment is bad. People having their 401(k)s or pensions lose significant value is not a good thing. I want this economy to turn-around and find stability. Unfortunately, in my view, in order to find stability we will have to endure pain. I don't think it is masochistic of me to prefer a painful reset which will pave the way for long-term sustainability.

Before I continue, let me explain a bit further. We have experienced consistent growth in GDP over the years, but over the last thirty years (and especially the last fifteen years) much of the growth has been fueled by debt. There is much to be researched and written on this subject and I will save it for another time. The key point is that debt can only expand so much relative to real economic growth. It is healthy for debt to default leading to winners and losers. We have employed a "kick-the-can" policy which only delays the inevitable and makes the future pain that much worse. This is why I'd prefer to experience this pain now rather than later.

So, what does this have to do with craps? Well, in craps there are two primary bets. One can bet on the "Pass" line or one can bet on the "Don't Pass" line. If you bet on the "Pass" line, then you are betting that the shooter (the person rolling the dice) will win. A bet on "Don't Pass" means that you are betting that the shooter will lose. If you've ever played craps, you'd recognize that people almost universally bet "Pass" and then cheer on the shooter.

There are a ton of other things that one can wager on in craps, but these are the basic bets. When the shooter begins the game, the dice are rolled with three possible outcomes. If a 2, 3, or 12 is rolled, the shooter loses. On a 2 or 3, the "Don't Pass" bets are paid even money; on a 12, the "Don't Pass" bets push with the house (they just get their money back). If the shooter rolls a 7 or 11, then the shooter wins and the "Pass" bets are paid even money. In all other cases, the "point" is made. The "point" becomes the target score for the shooter. The game continues until the shooter makes the point (by rolling the same number as the point) or until he/she "craps out" by rolling a 7. The "Pass" bets are paid even money if the shooter makes the point and the "Don't Pass" bets are paid even money if the shooter craps out.

I've taken the liberty of creating my own little chart to show the probabilities of winning with either a "Pass" or "Don't Pass" bet:

As you can see, the "Don't Pass" bet has a slight edge over the "Pass" bet. While the completely rational decision is to never play craps since the odds are against you, it is more rational to bet on "Don't Pass" than it is to bet on "Pass". Yet, people nearly universally bet on "Pass".

I think it's easy to recognize that this mentality is due to wanting to cheer for the shooter and go with the crowd. We see this with the stock markets where mainstream media commentators and even the President of the United States gleefully cheer for the Dow to go higher. Keep in mind that some people do lose money when the markets go higher and other would like to have stocks stay low so that they can buy low after saving more money.

On a secondary note, most of the stock market activity is nothing too different than gambling anyway. Market participants engage in "trading" where they seek to buy and sell stocks and derivatives for quick profits. A much smaller percentage of market volume is a result of investing.

So, while Wall Street gambles in the markets, most Americans seem to watch or place their bets in a attempt to cheer on an ever-growing market. It's not much different the visitor to Vegas who sidles up to the craps table, places chips on the "Pass" line and cheers on the shooter.