The Big Swing

Editorial Staff | Posted on April 8, 2010 |

The Big Swing

by Basil Nestor

When players hear the word “volatility,” they often picture a drunk guy who is red in the face and complaining about his bad hand. He is belligerent, criticizing the dealer, and generally being volatile. Yuck.We call that sort of volatility being “on tilt,” and it certainly can kill a bankroll quickly. But there is another sort of volatility, one that is more insidious and less obvious. It’s a mathematic hazard that creates extreme unexpected losses in gambling games.

Mathematic volatility is the gambling equivalent of a snake in the grass, or a hidden hairpin turn on the road. It comes up suddenly and can kill your bankroll. Optimal strategies and money management tactics are powerless if we get whacked right out of the starting gate by extreme volatility. So it pays (literally) for us to prepare for the phenomenon.

By the way, measurements for volatility come to us from the mathematic realm of standard deviation. Alas, many people consider this realm to be a migraine-inducing purgatory. Faced with such calculations, players often throw up their hands and shout, “Get thee behind me mathematician!”

But fear not. We’re going the easy way. No somnambulistic formulas, no Xs and Ys. Just clear-cut strategies that you can implement immediately.

The Big Swing
Everyone talks about the house edge and/or payback. People say that game A is better than game B, a 99 percent payback is better than 94 percent, and so forth. Focusing on payback is important, but keep in mind that volatility is not directly connected to the house edge, and it is not reflected necessarily in win frequency.

Rather, volatility is all about big changes in your bankroll. And here’s the catch; there are two parts to volatility. The first part you control when you choose the size and number of bets in your bankroll; this typically is called money management. The second part of volatility is the game’s internal swings; this is the way in which the contest determines how your “base bet” is multiplied or lost. Players often focus on the former part without realizing the influence of the latter.

For example, let’s say you have a bankroll of 100 bets. A super-low-volatility game would be a coin flip with a 1:1 payout. A super-high-volatility game would be 10-spot keno or any lottery contest.

Okay, so what?
Here is the so what. Some games (including many table games) have a much higher volatility than is immediately apparent during casual play. The practical result is that some players underfund their bankrolls and bust out early. Optimal strategy hardly has a chance because high volatility nukes the bankroll.

Specifically, blackjack is more volatile than baccarat. Video poker is more volatile than pai gow poker. Slots are more volatile than most table games. I’ll give you a ranked list a bit later. But first let’s take a closer look at…

Baccarat vs. Caribbean Stud Poker
Consider baccarat and Caribbean Stud Poker. Both are heads-up competitions, but their payoff structures are quite different.

Baccarat is about as close to a coin flip as you can get in a casino, both player and banker win nearly 50 percent of the time, and the payoff is always 1:1 for player and 0.95:1 for banker.

On the other hand, Caribbean Stud Poker has some wild fluctuations. Sometimes you win one base bet, other times it’s three base bets. Some hands can win five base bets or more. And we’re not even considering the super-volatile $1 progressive bet. How does the casino afford these extra payouts? It takes money from the bottom of the pay schedule.

I won’t go into the intricacies of CSP strategy, but it requires a lot of folding, up to nearly 50 percent of the time. And the other 50 percent you may be beaten in a showdown. So the majority of CSP hands are losers one way or another. The casino wins with frequency, and you make up most of the difference in sudden leaps when the casino pays five bets or better.

That, my friend, is high volatility. In fact, CSP is more volatile than some slot games.

Blackjack vs. Pai Gow Poker
Blackjack has a lower house edge than pai gow poker (0.5 percent vs. 2.5 percent when using optimal strategies), but surprise, surprise; blackjack has more volatility.

Here’s the hidden skinny on blackjack. The dealer has about a five percent edge in win frequency. Basic strategy lowers that edge with doubling, splitting, and extra payouts on naturals. The result is that you’re constantly risking extra chips and waiting for large payouts to reverse the dealer’s advantage.

Meanwhile, pai gow poker chugs along. The dealer has no advantage in win rate, and players are paid 0.95:1. Blackjack is a better game if you play one million hands, but you’ll see fewer extreme swings in three hours playing pai gow poker.

Tips for Handling Volatility
With a little practice, volatility is easy to spot. First, you look for large jackpots and other high payoffs. If you see a graduated schedule of payoffs, then the game has some volatility. Also, be wary of two-part bets, such as those in CSP and Three Card Poker.

Of course, there is nothing “wrong” with volatility, even though it can be risky. Indeed, it’s an opportunity to smack a big payoff, but volatility does require some bankroll adjustments. The adjacent table offers some examples.

These are recommended minimum bankroll amounts for a typical three-hour session to insure a greater than 90 percent chance of continuous action. A base bet can be any amount you choose.

These bankroll amounts give you a better than 90 percent chance of surviving a typical three-hour session (in most cases it’s better than 95 percent, but I’m being conservative). And you must use optimal strategy.

Keep in mind that contests such as craps, roulette, and slots allow multiple simultaneous bets, so you should adjust for this extra action. For example, betting five lines on a dollar slot is a $5 base bet. If you tend to play very fast or aggressively, increase your bankroll by another 20 percent.

Can you get by with a smaller session bankroll? Sure you can…sometimes. But volatility invariably strikes when you least expect it. It’s better to be funded properly. Nobody wants that sinking feeling when all the chips or credits disappear and you have to end the session prematurely, or slink away for a refill.

One other thing to remember, volatility works in reverse. Rather than winning large and infrequent payoffs, some games and gambling systems pay often in small chunks and cost you in large chunks. Craps lay bets are one example; the martingale is another. Again, there is nothing inherently “wrong” with these bets, except that you may not have a casino-size bankroll to cover a bad losing streak. In other words, don’t risk too much chasing small wins.

Do plan for outrageous fortune. A certain amount of volatility is inevitable, so give your good luck a good chance.

Enjoy the game!

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Basil Nestor is author of The Smarter Bet Guide to Slots and Video Poker, The Smarter Bet Guide to Blackjack, and other comprehensive gambling guides. Got a question? Visit SmarterBet.com and drop him a line.