In The Little Book of Behavioral Investing, James Montier relates a story by Paul DePodesta, of Moneyball fame, in the 16th chapter of the book.

That chapter also happens to be a shortened version of the 2008 research piece that Seth Klarman refers to in the last post.

DePodesta’s story weaves together casinos, baseball, and the importance of a good process. It begins with him playing blackjack in Vegas:

Many years ago I was playing blackjack in Las Vegas on a Saturday night in a packed casino. I was sitting at third base, and the player who was at first base was playing horribly. He was definitely taking advantage of the free drinks, and it seemed as though every twenty minutes he was dipping into his pocket for more cash.

On one particular hand the player was dealt 17 with his first two cards. The dealer was set to deal the next set of cards and passed right over the player until he stopped her, saying: “Dealer, I want a hit!” She paused, almost feeling sorry for him, and said, “Sir, are you sure?” He said yes, and the dealer dealt the card. Sure enough, it was a four.

The place went crazy, high fives all around, everybody hootin’ and hollerin’, and you know what the dealer said? The dealer looked at the player, and with total sincerity, said: “Nice hit.”

I thought, “Nice hit? Maybe it was a nice hit for the casino, but it was a terrible hit for the player! The decision isn’t justified just because it worked.”

Casinos have a natural advantage thanks to their process. They survive by offering games of chance that are ever so slightly tilted in their favor. They’ve built their business on a process that will win out over thousands of spins of the roulette wheel, rolls of the dice, or pulls of the slot machine.

Time is a key ingredient to their process.

In the short term, the casino will lose on some of those spins, rolls, or pulls. They fully expect that a few patrons will beat the odds and come out ahead. A casino’s process is built on looking “wrong” in the short term while being “right” in the long run.

Because of that, an intelligent gambler would recognize the odds are against them and not even play.

And then there’s blackjack.

As Ed Thorp would uncover, blackjack is the mathematical exception. In a perfectly rational world, every gambler would know Thorp’s simple rules, follow them to the letter, and come out ahead, assuming they play long enough.

Related: Emerging Markets in Tough Spot, Says Harvard Professor Reinhart

Mr. “Hit on 17” shows the real world is hardly rational.

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