# Stat 134 Fall 2011: Gambler s ruin

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1 Stat 134 Fall 2011: Gambler s ruin Michael Lugo Setember 12, 2011 In class today I talked about the roblem of gambler s ruin but there wasn t enough time to do it roerly. I fear I may have confused some eole by not stating some things as clearly as I could have, in the interest of saving time. Here s what I meant to say. Alice and Bob are betting on the outcomes of the fli of a coin, which comes u heads with robability, and tails with robability q = 1. Alice starts out with a units, and Bob starts out with b units. (In class I used r and s but I want those letters later.) We have n = a+b. They fli the coin reeatedly; each time it comes u heads, Bob ays Alice 1 unit, and each time it comes u tails, Alice ays Bob 1 unit. The game ends when one layer has no money; the other layer has n units at that time, and we say they win. There are two natural questions to ask: What s the robability that Alice wins? (Alternatively, what s the robability that Bob wins? It turns out that this game will, with robability 1, eventually terminate with one layer winning or the other, even though you could imagine it going on forever.) How long do we exect this game to last? The first question is something we can answer now; the second question we can t, mostly because we don t know what exect means. Maybe we ll revisit this later in the semester once we ve talked about exected value. Some secial cases The robability of Alice winning is of course a function of a, n and. (We could say it s a function of a, b, or of b, n,, but we won t.) We ll denote this function by f(a, n, ). For some secial cases we can find the robabilities by ath counting. a = 1, n = 2. Alice has one unit, and Bob has one unit. So Alice wins if the first toss comes u heads, and loses if it comes u tails. Therefore f(1, 2, ) =. a = 1, n = 3. Alice has one unit, and Bob has two units. Therefore: if the first toss is a tail, Alice loses. This haens with robability q. if the first two tosses are both heads, Alice wins. This haens with robability 2. 1

2 if the first three tosses are H, T, T, Alice loses. This haens with robability qq. if the first four tosses are H, T, H, H, Alice wins. This haens with robability q 2. The attern continues, with Alice winning if the first 2k tosses, for some k, are k 1 reetitions of H, T, followed by H, H. This haens with robability (q) k 1 2. Therefore Alice wins withrobability 2 + q 2 + (q) = 2 ( 1 + q + (q) 2 + ) = 2 1 q and so f(1, 3, ) = 2 /(1 q). a = 2, n = 3. In the revious case, interchange the airs Alice and Bob ; and q; heads and tails. When Alice starts with one unit, and Bob starts with two units, and heads have robability, Alice has robability 2 /(1 q) of winning. So when Bob starts with one unit, and Alice starts with two units, and tails have robability q, Bob has robability q 2 /(1 q) of winning. In this case Alice has robability 1 q 2 /(1 q) of winning. Simlifying, this gives f(2, 3, ) = /(1 q). a = 2, n = 4. Alice has two units, and Bob has two units. Therefore: if the first two tosses are heads, Alice wins. This haens with robability 2. if the first two tosses are tails, Alice loses. This haens with robability q 2. if the first two tosses are a head and a tail, in either order, then we re back where we started. This haens with robability 2q. So the robability that the game will return to the starting osition k times before Alice finally wins is (2q) k 2. The robability that Alice wins is therefore (2q) k 2 = 2 1 2q = q. 2 k=0 and this is f(2, 4, ). a = 1, n = 4. Alice has one unit, Bob has three. If the first toss is a head then we re in the situation of the revious case. If it s a tail Alice loses right away. So f(1, 4, ) = f(2, 4, ) = q 2. a = 3, n = 4. Alice has three units, Bob has one. If the first toss is a head Alice wins. If it s a tail then we re in the case a = 2, n = 4. So f(3, 4, ) = + (1 )f(2, 4, ) = (2 + q) 2 + q 2. n = 2a, = 1/2. Alice and Bob start out with the same amount of money. The coin is fair. It seems that the game is fair, and we guess f(a, 2a, 1/2) = 1/2. This isn t quite a roof, though. 2

3 The general case Consider n = 5; this is when it gets quite a bit harder to come u with arguments like the ones in the revious section that are based on counting the ways the game could evolve. So let s take a more robabilistic aroach. Let r k be the robability that Alice wins when she starts with k, and Bob starts with n k, and the robability of heads is. So r k = f(k, n, ), but it ll be easier to write r k. If k = 0 or k = n the game is over before it starts, with Alice losing and winning, resectively; so r 0 = 0, r n = 1. Otherwise we can break down what haens into two cases. Either the first toss is a head and then Alice has k + 1 or the first toss is a tail and then Alice has k 1. So we have the recurrence r k = r k+1 + qr k 1. You can check that the formulas we already derived satisfy this. But now we need some algebraic trickery to solve this recurrence in general. Write r k = r k + qr k to get Subtract from both sides to get r k + qr k = r k+1 + qr k 1. r k+1 r k = qr k + qr k 1. We now let s k = r k r k 1 be the difference between two consecutive r k. Then we have s k+1 = qs k and solving for s k+1 gives s k+1 = (q/)s k. Therefore we have s 2 = q s 1, s 3 = q s 2 = ( ) 2 q s 1,, s k = ( ) k 1 q s 1. Now notice r 1 = s 1, r 2 = s 1 + s 2, and so on. We get the formula ( r k = s 1 + s s k = s q ( ) ) k 1 q (q/) k = s 1 1 (q/). (1) But we know that r n = s 1 + s s n = (r 1 r 0 ) + (r 2 r 1 ) + + (r n r n 1 ) = r n r 0 = 1 0 = 1. In articular we can use equation (1) with k = n to get r n = s 1 1 (q/) n 1 (q/) 3

4 and we know r n = 1, so we have Finally, then we get s 1 = 1 q/ 1 (q/) n. r k = s 1 1 (q/) k 1 (q/) = 1 (q/)k 1 (q/) n and restoring the original notation gives the formula f(k, n, ) = 1 (q/)k 1 (q/) n for the robability that Alice wins starting with k units, when Bob starts with n k units, and the robability of heads is. If = 1/2, then q/ = 1 and we can t use this formula. But in that case you get s k+1 = s k that is, the differences between consecutive r k don t deend on k and so f(k, n, 1/2) = k/n. Who cares? You are in Las Vegas, and it will cost you 200 dollars to get back to Berkeley. You have 100 dollars. You are going to try to lay roulette, betting on red at each sin of the wheel, in order to make enough money to get back. This is like fliing coins, excet = 18/38. How should you bet? Let s say you re going to bet 100/x dollars at each sin of the wheel, where x is an integer. Then we ll let the unit of money be 100/x dollars. You have x units and you want 2x units; the robability that you ll get your 200 dollars back before you run out of money is f(x, 2x, ). Using the formula we already derived, f(x, 2x, ) = 1 (10/9)x 1 (10/9) 2x since q/ = (1 )/ = (20/38)/(18/38) = 10/9. We can rewrite this as f(x, 2x, ) = (10/9)x 1 (10/9) 2x 1 = 1 (9/10) x (10/9) x (9/10) x. This seems like a silly way to rewrite things, but actually it s not. If x is large, we can ignore the terms (9/10) x and so we get f(x, 2x, ) 1/(10/9) x = (9/10) x. So if your bets are small you have a very small robability of winning. In terms of limits, lim x f(x, 2x, ) = 0 when < 1/2 as the size of the bet gets small relative to the bankroll, the robability of winning aroaches zero. Furthermore, it s easy to see (by grahing) that f(x, 2x, ) is a decreasing function of x. As x gets bigger that is, as your bets get smaller, the robability of winning gets smaller. 4

5 The otimal strategy is to bet everything on a single sin that is, to let x = 1 in which case your robability of winning is f(1, 2, 18/38) = 18/38. But now look at this from the oint of view of the casino. From the casino s oint of view = 20/38 they win exactly when you lose. So the robability that the casino wins becomes larger as the ratio (total amount of money)/(single bet) the number of units of money at risk gets larger. You can show that lim x f(x, 2x, ) = 1 if > 1/2. The house always wins. (Even if you had = 1/2, in reality the casino has much more money than you. We have, for examle, f(100, 10 6, 1/2) = 100/10 6 = 10 4 so if you show u in Vegas with one hundred dollars to gamble, and the casino has a million dollars, and you are offered fair games, you have one chance in ten thousand of bankruting the casino. Of course the actual chance that a single gambler will bankrut the casino is much less than this; it must be since more than ten thousand eole gamble in Vegas every day. I just made this fact u, but it seems right.) The moral of the story is as follows. If the odds are against you, and you need to get to a certain amount, bet big this means that you have to make less bets, and the law of large numbers (which we ll study more later) doesn t have time to hurt you. If the odds are in your favor, bet small then you make more bets, and the law of large numbers is likely to work in your favor. 5

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