When I first visited Las Vegas, I was completely absorbed by her exuberant beauty. The moving statues of Caesar Palace, white tiger in The Mirage, pyramid of Egypt, Statue of Liberty, and the list goes on... These are expensive eye candies to build and maintain, and the hotels are not making any money by providing them. Where does the money come from?

From the casinos, of course. So, how does a casino get so rich? It's gambling anyway, doesn't a casino also lose sometime? Yes, a casino does lose sometime.

However, over the long run a casino will never lose, because

1. it has a slight edge over the players and
2. it takes large number of small bets

Consider betting 'red' or 'black' in a game of American roulette wheel. As there are 2 green pockets, your chance of winning is only 18/38 = 47.37%. Most, if not all, players are aware that the house has a slight edge over them; what they failed to realise is that a slight edge is all it takes for a casino to rake in huge profits as long as it is taking large numbers of small bets over a long period of time. This is known as the law of large numbers.

Simply put, the law of large numbers states that for a random sample of n random variables with mean x, the sample mean converges to x as the size of the sample approaches infinity. We can think of the outcome of a bet as a random variable. This law tells us that as the number of bets becomes very large the average result will get closer to the house edge.

In other words, if Bill Gates is to bring $1billion dollars to a casino and want to make a single bet, the casino will NOT accept his bet. The casino is interested only in guranteed winnings by exploitng the law of large numbers, i.e. taking large number of small bets over a long period of time. Ironically, casinos do not gamble; only players gamble.

This also means that if you have $100 and your objective is to win another $100, the best approach that maximizes your chance of winning is to make a single bet of $100. The more you play the more the house edge will grind you down, and you are more likely to lose.

The bottomline? Don't visit a casino at all as the odds are against you. If you can't resist the temptation - just like a lot people who cannot resist the temptation to constantly buy and sell in the market - then be very mindful of how the house's edge and the law of large numbers can work against you.

And try to overcome this temptation before you lose your pants.

Next Article: What can traders and investors learn from the casino?