The luck factor in a casino game is quantified using standard deviation (SD). The standard deviation of a simple game like Roulette can be
calculated using the binomial distribution. In the binomial distribution, SD = sqrt (npq), where n = number of rounds played, p = probability of winning, and q = probability of losing. The binomial distribution assumes a result of 1 unit for a win, and 0 units for a loss, rather than -1 units for a loss, which doubles the range of possible outcomes. Furthermore, if we flat bet at 10 units per round instead of 1 unit, the range of possible outcomes increases 10 fold. Therefore, SD (Roulette, even-money bet) = 2b sqrt(npq), where b = flat bet per round, n = number of rounds, p = 18/38, and q = 20/38.
After 10 roundsFor example, after 10 rounds at $1 per round, the standard deviation will be 2 x 1 x sqrt(10 x 18/38 x 20/38) = $3.16. After 10 rounds, the expected loss will be 10 x $1 x 5.26% = $0.53. As you can see, standard deviation is many times the magnitude of the expected loss.
The range is six times the standard deviation: three above the mean, and three below. Therefore, after 10 rounds betting $1 per round, your result will be somewhere between -$0.53 - 3 x $3.16 and -$0.53 + 3 x $3.16, i.e., between -$10.01 and $8.95. (There is still a 0.1% chance that your result will exceed a $8.95 profit, and a 0.1% chance that you will lose more than $10.01.) This demonstrates how luck can be quantified; we know that if we walk into a casino and bet $5 per round for a whole night, we are not going to walk out with $500.
even-money RouletteThe standard deviation for the even-money Roulette bet is the lowest out of all casinos games. Most games, particularly slots, have extremely high standard deviations. As the size of the potential payouts increase, so does the standard deviation.
As the number of rounds increases, eventually, the expected loss will exceed the standard deviation, many times over. From the formula, we can see the standard deviation is proportional to the square root of the number of rounds played, while the expected loss is proportional to the number of rounds played. As the number of rounds increases, the expected loss increases at a much faster rate. This is why it is impossible for a gambler to win in the long term. It is the high ratio of short-term standard deviation to expected loss that fools gamblers into thinking that they can win.
The volatility indexThe volatility index (VI) is defined as the standard deviation for one round, betting one unit. Therefore, the VI for the even-money American Roulette bet is sqrt(18/38 x 20/38) = 0.499. The variance (v) is defined as the square of the VI. Therefore, the variance of the even-money American Roulette bet is 0.249, which is extremely low for a casino game. The variance for Blackjack is 1.2, which is still low compared to the variances of electronic gaming machines (EGMs).
It is important for a casino to know both the house edge and volatility index for all of their games. The house edge tells them what kind of profit
they will make as percentage of turnover, and the volatility index tells them how much they need in the way of cash reserves. The mathematicians and
computer programmers that do this kind of work are called gaming mathematicians and gaming analysts. Casinos do not have in-house expertise
in this field, so outsource their requirements to experts in the gaming analysis field, such as Mike Shackleford, the "Wizard of Odds".