Card Counting

This will probably be a real spam magnet but anyhow….

Some time ago, while I was still at uni, with a few friend I tried card counting blackjack. Like all casino games blackjack is in the house’s favour. However over the course of a deck (or several decks) this is not always the case for every hand. By keeping track of the cards that have come out of the deck, you can determine when the game is in your favour and increase your bet accordingly. Contrary to popular opinion you don’t need to track the actual cards that have been removed but rather keep a running tally on their effect on the game.

Certain cards are good for the player. A deck rich in aces gives more chance of blackjack with its higher pay out and a deck rich in tens gives the dealer who must hit automatically until he gets 17 or more, a much higher chance of going bust. Conversely a deck rich in 4, 5 and 6’s is bad for the player. The dealer will more rarely go bust as these cards will save him from going bust when he gets to totals of 14-16. The basics of such a system of counting and betting were first shown by Edward O. Thorpe and rely on both inferring a proportional measure of the expectation for a single bet and the use of the Kelly Criteria, in essence betting amounts proportional to your expected chance of winning.

In a small deck this is particularly effective as you get towards the end of the cards, but it’s also effective in large decks as well. Particularly if they place the cut card, which determines the point when the decks are reshuffled, near the end. Casinos of course take a dim view of the idea that someone else other than the house could be playing a positive expectation game and so try to stop it typically by banning the players in question. Counting is not illegal, but the casino is free to exclude anyone they don’t like.

The reality of the situation though is that unless you have a large bank roll you are better off working at McDonald’s, and if you are playing alone its pretty easy to detect someone with wild swings in their betting patterns, particularly if they are winning money. Still it was possible for us on many trips to the casino to sit off a table not playing until the deck was “hot” and then jump in and lay some bets. This makes you pretty obvious but if you are serious low rollers like we were when we were uni students then I doubt they are worried particularly.

Successful counters these days work in teams. A reasonably interesting book on the subject is Bringing Down the House, which although it concentrates too much on the glamour of the high-roller lifestyle and not enough on the actual scheme.

As for our little project, it slowly disappeared into nothing more than an occasional drunken trip to the casino where we would attempt to count through the haze. I note though now that the Star City Casino has put in continuous shuffle machines and the whole hope of counting is gone. I wonder whether it is actually a positive revenue deal for them. After all people like me will only play if they have the knowledge that they might just be able to have an edge even though in practice they rarely will. For the casino I guess giving this money away is worth it if it means avoiding serious counters.

Protecting us from ourselves

A friend of mine who has recently become an expectant father, found out that he needed to find out his blood type. For those not aware there can be complications if the mother has an RH negative blood type and the baby has RH positive. The complications can be avoided by some injections, but are also unnecessary if the father is also RH negative as the baby will then always be RH negative as well and there is no risk of reaction. This is the case with my wife and I who are both RH negative.

So anyhow, to avoid unnecessary treatment my friend decided to get his blood type determined only to turn up and discover that they were unable to obtain this simple test without a referral from a doctor, which would of course require an appointment and cash.

Annoyed at this waste of resources he sent off an email to a number of friends, several of whom are medical doctors, complaining bitterly at the waste of his time, his money and the government’s money that was involved in this process.

My immediate (and deliberately provocative) response was that it was due to the closed shop that doctors were running where everything has to be processed by one of the union and I think there is certainly something in that. However I want to explore the response from the doctors.

Food politics

An interesting piece in The Economist discussing issues around, organic food, fair trade and ideas about embedded energy, or food miles. Some of these topics I’ve mentioned in earlier posts.

On the claim organic food is better for the environment:

Perhaps the most eminent critic of organic farming is Norman Borlaug, the father of the “green revolution”, winner of the Nobel peace prize and an outspoken advocate of the use of synthetic fertilisers to increase crop yields. He claims the idea that organic farming is better for the environment is “ridiculous” because organic farming produces lower yields and therefore requires more land under cultivation to produce the same amount of food… The more intensively you farm, Mr Borlaug contends, the more room you have left for rainforest.

On fair trade coffee:

The standard economic argument against Fairtrade goes like this: the low price of commodities such as coffee is due to overproduction, and ought to be a signal to producers to switch to growing other crops. Paying a guaranteed Fairtrade premium—in effect, a subsidy—both prevents this signal from getting through and, by raising the average price paid for coffee, encourages more producers to enter the market. This then drives down the price of non-Fairtrade coffee even further, making non-Fairtrade farmers poorer. Fairtrade does not address the basic problem, argues Tim Harford, author of “The Undercover Economist” (2005), which is that too much coffee is being produced in the first place…

But perhaps the most cogent objection to Fairtrade is that it is an inefficient way to get money to poor producers. Retailers add their own enormous mark-ups to Fairtrade products and mislead consumers into thinking that all of the premium they are paying is passed on. Mr Harford calculates that only 10% of the premium paid for Fairtrade coffee in a coffee bar trickles down to the producer. Fairtrade coffee, like the organic produce sold in supermarkets, is used by retailers as a means of identifying price-insensitive consumers who will pay more, he says.

Draft nuclear report

The draft report of the Uranium Mining, Processing and Nuclear Energy Review has been released and is available in whole and parts here. I haven’t yet been able to read the documents, but from the summaries appearing in the news they aren’t telling us anything that wasn’t already known. In short that nuclear is more expensive than coal in Australia, and only becomes cost effective if we put a price on carbon emissions. With regards safety, it finds it to be safer than other energy industries, and poses no additional nuclear proliferation risk.

I’ll try to comment when I actually read more of the report.

Inheritance Tax

If nothing is certain except death and taxes, why not get them out of the way at the same time? I’ve often wondered why an estate or inheritance tax is not used in Australia. To me it seems a logical and comparatively fair way of performing the burden of taxation. Income taxes make generating wealth more difficult, so why not shift the burden off those actually generating new wealth and place it increasingly on to those who are getting it merely due to chance of birth?

Surely raising taxes this way is more efficient? Taking it off those who have windfall gains rather than those who are actually generating the most must be more efficient. In principle I can’t see any arguments against it that don’t also apply to income tax. I can understand there may be considerable practical difficulties in actually doing this, but this does not seem to be the reason people are against it.

So can anyone give me a good reasons for not having an inheritance tax in exchange for lower income tax? Or is it just a fantastic idea that we should go back to?

Minimum wages

I’ve been thinking and reading recently about the value of minimum wages. From what I’ve read most economic theory is against minimum wages on the ground that it increases unemployment. There is a fairly obvious argument with regard the fact that a minimum wage will price out people who would otherwise be able to get a job at a lower wage because, while their labour still has value to an employer, its less than the minimum allowable by law and they are thus shut out of the market.

Under this rationale a minimum wage may mean that some workers may get paid more, but they do so at the expense of those who would otherwise work. The minimum wage therefore creates unemployment and makes poorer those who would otherwise work.

I’ve no doubt that there is truth in this. Certainly if you raised the minimum high enough then it would undoubtedly cause unemployment.

On the other hand even if you could pay people 1 cent per hour the real effective minimum wage is considerably higher than that due to the training/management/hiring costs in your own time not to mention getting a decent return on any capital you may have invested for the employee to use and this is even if there was no other regulations on employment. A minimum wage below a certain point is going to have minimal impact on unemployment.

Institutions and Empire

As a maths nerd with an interest in history I find attempts to actually quantify various historical effects extremely interesting, even if they are ultimately often flawed. This article in The Economist shows how economists, or really more accurately statisticians, are trying to sort through various historical outcomes to measure the value of different institutions as an explanation for wealth and poverty.

Of the many proposed solutions to that riddle (technology, geography, the Protestant ethic) the current favourite is rather bland in the abstract: “institutions”. In rich economies institutions—meaning the formal laws and unwritten rules that govern society—function rather well on the whole. In poor ones they don’t. That much is indisputable.

What is tricky is showing that good institutions are a cause of economic progress rather than a by-product of it. You cannot run controlled experiments in which a particular institution is randomly imposed on some countries, but not on others, in order to compare how they fare. Or at least economists can’t. But perhaps imperialists can. Maybe the colonial adventures of the past provide the natural experiments economists need to put their theories to the test.
…
What is ingenious about the recent economic studies of empire is how they overcome this problem. Imperial institutions may determine prosperity, but the reverse may also be true. The trick is to find some third factor that is securely linked to institutions, but entirely unconnected to economic success. Such factors are called “instrumental variables”, because the economist is interested in them not for themselves, but for what they tell him about something else.

That name, however, now seems quite ironic. Because all of the fun in the recent spate of papers is in the instruments themselves. Economists are outdoing each other with ever more curious instruments, ranging from lethal mosquitoes to heirless maharajahs, or, most recently, wind speeds and sea currents.

It has often been said that you were better off being colonised by the British than say the Spanish and Portugese and in general the studies bear this out. Although also pointing out that it wasn’t necessarily a positive.

Macro economic prediction and errors

I have been looking at this research report from ABARE on their forecasts for different scenarios of Global Warming effects and the cost Australia in terms of GDP. As someone trained in science one thing that I find striking about this is that whereas scientific estimates include some estimate of uncertainty, eg the IPCC’s estimate of the effect on AGW to 2001 of 2C and 4.5C. The forward estimates of GDP do not.

This strikes me as bizarre that no attempt to quantify the error band for GDP estimates is made particularly over such a long time frame. Even over the time period of one year forward we could expect a standard deviation of perhaps +/- 0.5% on the GDP estimates and that is probably generous. Over the 50 year time frame this error (assuming they are independent random errors) would scale to around 3.5%. Given that the differences in the outcomes between scenarios for all but the most punative carbon tax are mostly smaller than this it would tend to suggest that the model isn’t really accurate enough to distinguish between the different scenarios and instead they are quoting false precision.

Perhaps I have missed something and there is some footnote explaining this, or some standard assumption but I can see it and if so can someone please point out the relevant information. More likely I think they don’t want to admit inability of their models to clearly distinguish between different courses of action.

The Stern Review

By now its been all over the news and some discussion at other sites. Still for my own and other’s references here I will briefly discuss some things about what it says about AGW. Firstly the full report can be seen here. As well as the full document there are long and short summaries. I hope to get around to discussing some of the meat about emissions markets and so forth later.

The main conclusion can be seen in this extract taken from the short summary.

Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

The policy outlined in the full executive summary advocates three main policy directions as necessary to properly tackle the problem. Carbon pricing, investment in technology and measures to assist in behavioural change including labelling for energy efficiency. I’ve discussed most of these before although I have been less positive about the role of government in the technology investment.

Congestion Charging

Harry Clarke has an interesting piece on the need for congestion charging, how it might be done equitably and the importance of paying for curbside parking in this. I have an excerpt below but I suggest people read the whole thing for themselves.

For pricing to be politically feasible governments must demonstrate that tolls are not a tax grab. Governments must show that all groups are advantaged with efficient pricing. Economists know that with appropriate compensations they can be but this needs to be spelt out to those affected. Tolling charges can be explicitly linked to tax savings elsewhere or to ear-marked infrastructure improvements, such as improved public transport, that benefit transport consumers.

The net benefit of a revenue-neutral switch to congestion pricing roads in the cities stems from the ‘double dividend’ green tax advantages of such charges. Congestion charges yield a revenue dividend but target a social ‘bad’ congestion rather than other taxes which target work effort or savings.