Interesting article in this quarters sascom magazine by Jeff Ma – the guy behind “bringing down the house” and the movie “21”.

After explaining how he felt the power of analytics and statistics was not unlike believing in God, he shared 2 stories where that faith was put to the test. One where it worked (sports betting) and one where it didn’t (options trading).

In his last section (repeated here), he boils it down to 2 commandments of analytics …
The first commandment is the importance of understanding variance, and it's a very difficult concept for people to become comfortable with. In 2007, Dr. Bob had a run where he went 5–32 (5 wins and 32 losses) and received hate mail from his clients. "The problem," he said, "is that people just don't understand variance." Yet Bob's clients began canceling their subscriptions and deciding not to follow him ... [but]win he did, to the tune of 38-7 over the next three weeks. Learning to cope with variance is an important lesson regardless of whether you bet on blackjack, or on sports, or never plan to set foot in a casino.

The second commandment of our statistical religion is the importance of a long-term perspective and the commitment to invest in it. Dr. Bob's bad run over 37 games destroyed both the confidence and bankroll of his non-believing clients. He had a terrible success rate of 14 percent in those 37 games, but his record in nearly 20 years and over 10,000 games was a solid 56 percent.

All good stuff, but the true diamond in his story is contained in the very last paragraph …

Long runs of bad luck in Vegas constantly tested our nerves and our belief in statistics. We had to maintain a long-term perspective and, more important, we had to have a big enough bankroll to ride out the inevitable downward swings. So the lesson in business, as in blackjack, is that you need to have a long-term perspective and the corresponding financial commitment to make analytics pay off.

How true!

Read the whole story in the first quarter 2011 edition of sascom magazine