Belmont Club

A Martingale Sang in Maiden Lane

As the President’s party heads for apparent catastrophe, Kevin Drum enumerates 5 myths that President Obama should never believe.

  • Obama has squandered the popularity he built up during the 2008 campaign
  • Democrats are in for a November pummeling because they overreached
  • Obama should have focused like a laser on jobs instead of fiddling around with health care reform
  • The public is terrified of budget deficits and has turned against vast government spending programs
  • A big loss in November means Obama is a one-term president for sure

Here’s another myth that maybe he shouldn’t believe: that Napoleon once said: “Never interrupt your enemy when he is making a mistake.”

When you are behind, but feel sure you’re betting on the right combination, one suggested strategy is to double down, because something will come through and the visionary better will be justified in the end. Susan Estrich gives Nevada voters the same advice. Keep electing Harry Reid.  “Harry Reid should win. I’m not talking about whether he deserves to win.”

You could spend a lot of time yelling back and forth about who is to blame for all of this. Should we finger the officials who deregulated the markets? The financial institutions that provided risky mortgages? The others that packaged them or rated them? The people who bought them? All of the above?

It won’t get you anywhere at all. You can debate about who is going to fix it or who should, but at the end of the day, we all know that the government is going to be part of the “answer,” whether or not it’s one you support.

That is why Reid should win. Reid can do a lot more for the people of Nevada at a time when they need all the help they can get. He can do that because, if he’s re-elected, the president will owe him.

And then Nevada can get all that “free” stuff. Even with Harry Reid. But politics aside, is doubling down a good strategy? How much weight should Democratic strategists put on the negative feedback they are about to receive from voters versus the assurance of their own vision that they are headed in the right direction? Should they disregard it and hew close to their pure vision?

The strategy of waiting until the luck turns has been around for some time. It is called the Martingale strategy. To some extent the entire leftist program is based on the idea that, whatever its historical record, the big payoff will come in some day. If socialism has always failed, that is because it hasn’t been tried hard enough. Never mind that the Soviet Union, North Korea, Cuba and Venezuela are down the tubes. That’s invalid data. Never mind Illinois, forget California. That’s because the whole system hasn’t turned over. But on the day every aspect of change has been put in place the visionaries will hit it big, so big that everyone will forget the flops that have gone before.

Originally, martingale referred to a class of betting strategies popular in 18th century France. The simplest of these strategies was designed for a game in which the gambler wins his stake if a coin comes up heads and loses it if the coin comes up tails. The strategy had the gambler double his bet after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake. Since a gambler with infinite wealth will, almost surely, eventually flip heads, the Martingale betting strategy was seen as a sure thing by those who advocated it. Of course, none of the gamblers in fact possessed infinite wealth, and the exponential growth of the bets would eventually bankrupt those who chose to use the Martingale. It is therefore a good example of a Taleb distribution – the gambler usually wins a small net reward, thus appearing to have a sound strategy, but the gambler’s bet still has a negative expected value because there exists a small probability that he will suffer a catastrophic loss instead. It is widely believed that casinos instituted betting limits specifically to stop Martingale players, but in reality the assumptions behind the strategy are unsound. Players using the Martingale system do not have any long-term mathematical advantage over any other betting system or even randomly placed bets.

But if the doubling down in fact results in a Taleb distribution then the Left may be heading for a catastrophic outcome after years of seemingly steady “gains.” The Taleb distribution describes the behavior of bubbles where everything gets better until everything fails, which eerily resembles the situation we see now. Playing this game is generally bad for everyone except for those who “exit the game” early; who take the money and run before the catastrophe unfolds. They are the only ones who can win in such a game. But the problem is that there is only room for a few. All the rest are screwed. If we are in a bubble situation there may be room on the exit strategy for Barack and Harry, but will there be space for Kevin and Susan?

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