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Old 11-25-2003, 03:41 PM
Homer Homer is offline
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Join Date: Sep 2002
Posts: 5,909
Default Re: Question About Standard Deviation

With knowledge of your standard deviation (SD) and mean (win rate, EV, whatever you want to call it), you can determine your risk of ruin (ROR) for a given bankroll (or vice versa). Also, you can do things such as assess how likely a losing or winning streak was.

Sources

Risk of ruin equation (Thank you BruceZ)

Computing your standard deviation (Thank you Mason)

Examples

Let's say you have an EV of 1 BB/hr and an SD of 10 BB/hr (which you solved for with the assistance of Mason's article). Here are some things you can do:

<font color="blue">1)</font> You have a bankroll of 300 BB's, and would like to know what your ROR is:

r = exp(-2uB/sigma^2) = exp(-2*1*300/10^2) = exp(-6) = ~.25%

<font color="blue">2)</font> You would like to have a risk of ruin of 1%, and are wondering what size bankroll is required:

B = -(sigma^2/2u)ln(r) = -(10^2/2*1)*ln(.01) = ~230 BB's

<font color="blue">3)</font> You have just suffered through a 150 BB losing streak over your last 50 hours of play. You would like to know how often you should expect to lose that much or more:

a) Solve for your EV over a 50 hr stretch:

EV/hr = 1 BB
EV/50 hrs = 50*1 = 50 BB's

b) Solve for your SD over a 50 hr stretch:

SD/hr = 10 BB
SD/50 hrs = 10*sqrt(50) = 70.7 BB's

c) Determine how many negative standard deviations you have suffered through to lose 150 BB's:

50 + 70.7*x = -150
70.7*x = -200
x = -2.83 SD's

d) Look up N(-2.83) in a probability table or use Excel (go into a cell and type <font color="green">=normsdist(-2.83)</font>):

The value is .234%, or 1/427.

-- Homer
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