Having recently covered the topic of gambling and math in Wanna Bet? and Scam School, I feel I should do the responsible thing, and cover the downside of gambling and math, as well. Even when the math is solidly behind you, the real world can often bring other factors into play.

Take the case of an anonymous couple from the south coast of England. They traveled to Owlerton Stadium to place bets on the greyhound races. Now, the jackpot for picking the 6 winners in all 6 races that day had reached a record-breaking £101,110.39 (Over US$165,000 at this writing!), so this English couple formulated an idea that would mathematically assure them the jackpot.

They gathered together £46,656, which was enough money to cover every possible placing of all six dogs in all six races, thereby both qualifying them for the jackpot, and assuring them of a win. As I mentioned, the real world often brings other factors into play. Since you have to bet in cash, the cash could have been stolen. Fortunately, that didn't happen.

However, it turns out there were other qualifying winners that day. Had there been only one other winner, the couple would've still made a modest profit of just under £3,900. However, there were 2 other jackpot winners, so it was divided evenly into prizes of just over £33,700 - resulting in a net loss of roughly £13,000 for the couple!

On the upside, at least the couple were aware they were gambling, as all the trappings are there, such as the betting window, the posting of odds, the daily specials, and so on. The math of gambling gets even more vicious when the fact that you're gambling is hidden.

Take a look at Swoopo.com. At first glance, it simply seems to be an auction site similar to eBay, with deals that are far more incredible. Looking at their front page right now, I see a Apple iPod touch 32 GB (new generation) getting ready to go for less than $15 (about $400 retail) and a Sony PSP 3000 that just sold for $38.28 (about $170 retail).

How can they do this? Take a closer look at the process. Most auctions start at 12¢, and each bid increases the price by 12¢ (There are also 2¢ and 6¢ auctions with similar rules). Even more interesting, if you're bidding in the final minutes of the auction, as has become so popular at sites like eBay, the time gets extended, as well! This enables more people to bid in the final minutes, especially there is more interest in a given auction.

What's the catch? The simple act of placing a bid costs you 60¢, whether or not you win. That's not 60¢ for the right to bid in an individual auction, that's 60¢ each time you place a bid.

Since I wrote about that Apple iPod Touch just a few minutes ago, it's now up to just under $20. Let's assume it closes at, say $24.60, and the winning bidder put in 20 bids before winning the iPod Touch. The person who won actually paid $36.60 for that iPod Touch ($24.60 for the item itself, plus $12 in bids), which is still a great deal for that person. However, if there are 40 other people who lost, each placing an average of 20 bids, that's $480 made by Swoopo.com in exchange for nothing more than the chance itself to get the item cheaply!

I'm more than willing to wager that my numerical estimates are far too low, in terms of both bids and bidders.

There's more detail on Slate's Big Money article The Crack Cocaine Of Auction Sites, by Mark Gimein. The best quote out of that article refers to Swoopo as, “the evil bastard child of game theory and behavioral economics.” If you want to get an idea of just how vicious game theory can be, you can read my Prisoner's Dilemma post from 2007.

To quote both Gimein and the computer from WarGames, it seems that, when it comes to gambling, the only winning move is not to play.

How about a nice game of Knight's Tour?