Vegas -

I played some Slots.  Actually I put a dollar in the machine, bet a penny, and won $4.25.  At this point I quit and collected by $5.25 thinking my return could never be higher.  

The Gamblers Ruin problem goes back to the 1600s.   If 2 gamblers bet back and forth a dollar you can calculate the probability that one will go bankrupt.   I listened to Joe Blitzstein's lecture on this on his Harvard stats course at Itunes U

The important parameters are that gambler A has i amount of money and gambler B has N-i

The probability of A winning a round is p and of B winning is q which = 1 - p

If p = q, fair odds,   then the odds of A winning = i/N or what fraction of the wealth A has.

The Probability of A winning = 1-(q/p)^i/1-(q/p)^N with unfair odds. 

if p = .49 and i=N-i that is A and B have equal amounts of money.
then if N = 20   the chance of A winning is .4
           N =  100 the chance of  A winning is .12
           N = 200  the chance of  A winning is .02

In Las Vegas the casino has more money and games are more unfair

Since the probability of A winning + the probability of B winning is 1 there is no chance the game goes on forever.



In slots it is hard to figure out the odds of winning a hand as you can read below.

From Wikipedia
The return to player is not the only statistic that is of interest. The probabilities of every payout on the pay table is also critical. For example, consider a hypothetical slot machine with a dozen different values on the pay table. However, the probabilities of getting all the payouts are zero except the largest one. If the payout is 4,000 times the input amount, and it happens every 4,000 times on average, the return to player is exactly 100%, but the game would be dull to play. Also, most people would not win anything, and having entries on the paytable that have a return of zero would be deceptive. As these individual probabilities are closely guarded secrets, it is possible that the advertised machines with high return to player simply increase the probabilities of these jackpots. The casino could legally place machines of a similar style payout and advertise that some machines have 100% return to player. The added advantage is that these large jackpots increase the excitement of the other players.
The table of probabilities for a specific machine is called the Paytable and Reel Strips sheet, or PARS. The Wizard of Odds revealed the PARS for one commercial slot machine, an original International Gaming Technology Red White and Blue machine. This game, in its original form, is obsolete, so these specific probabilities do not apply. He only published the odds after a fan of his sent him some information provided on a slot machine that was posted on a machine in the Netherlands. The psychology of the machine design is quickly revealed. There are 13 possible payouts ranging from 1:1 to 2,400:1. The 1:1 payout comes every 8 plays. The 5:1 payout comes every 33 plays, whereas the 2:1 payout comes every 600 plays. Most players assume the likelihood increases proportionate to the payout. The one midsize payout that is designed to give the player a thrill is the 80:1 payout. It is programmed to occur an average of once every 219 plays. The 80:1 payout is high enough to create excitement, but not high enough that it makes it likely that the player will take his winnings and abandon the game. More than likely the player began the game with at least 80 times his bet (for instance there are 80 quarters in $20). In contrast the 150:1 payout occurs only on average of once every 6,241 plays. The highest payout of 2,400:1 occurs only on average of once every 64³=262,144 plays since the machine has 64 virtual stops. The player who continues to feed the machine is likely to have several midsize payouts, but unlikely to have a large payout. He quits after he is bored or has exhausted his bankroll.^[21]

The Value of Everything

The Federal Reserve calculates the value of Assets in the USA  (Table B – 100 )

Assets

Real-estate                 18   trillion

Pensions                     13   trillion

Family businesses      6.2 trillion

Deposits in banks      7.9 trillion

Corporate Equity       8.5 trillion

Mutual Funds                        4.7 trillion

Durables                    4.6 trillion

Treasury bonds         1   trillion

Corporate bonds       1.9 trillion

Life insurance            1.3 trillion

Other                          2 trillion

Total                           70 trillion

Liabilities

Mortgages                  10 trillion

Credit                                      2.5 trillion

Loans                          1.4 trillion

Total                           13 trillion

Net worth                  56 trillion

Federal debt              14 trillion

State debt                  3 trillion

Human Capital  = national income(gdp) / (int- growth rate) 

                               = 13 trillion / (.05/.03)

                               = 260 trillion

Conclusion -  Suzy Orman is right.  People should come first, money second. Increasing the value of human capital through education, a social safety net, healthcare, a higher minimum wage will increase wealth more than investing in things.

Stats in Risk   

Probabilities were invented in 1600s.  Kahneman showed that people round off their probabilities to: won’t happen, will happen, or maybe.  We are not good a judging how much insurance we need.  Robert Shiller points out that with stats we are like the cultures that count one, two, and, many.  They are able to remember hundreds of different plants but they do not count. 

In emergent theory outcomes are dependent on millions of little things, independent events, that accumulate.   Think of humans from DNA.

Unexpected events are often caused by a failure of the independence of these events.   For example changes in the stock market indices should be random since market changes are based on news, which is random and the indices cancel out individual stock risk.  Are stock returns independent variables?  They are until group think sets in. 

Fat tail events complicate this model.   In Finance, low probability shocks that shouldn’t happen occur.This is why geometric returns are more useful.  Outliers exist .  Random shocks to the economy are normally distributed. In nature the normal distribution is not the only distribution that occurs and some

other distributions have fatter tails.   -  Kurtosis

The Central limit theorem is probably the most important theory of statistics.  if you have independent identically distributed random variables and they have a finite variance  then the distribution of an average of these variables converges to a normal distribution as the number is increased.  The normal curve is so common because so many things we observe are averages of separate events.   Note that he normal distribution does not have fat tails.   This is why things work most of the time.

One reason that the normal distribution is so common because most events we observe are an average of independent events.   In a normal distribution the tails drop off.   It assumes the underlying variables have a finite variance. 

Other stat concepts include

Variance – is the sum of weighted probabilities of deviation from the mean

And standard deviation = square root of the variance

Covariance - how two different random variables move together?

 Can be positive, negative, or zero if unrelated

Correlation -  is scaled  -1  to +1

P = cov(x,y) /(s1,s2)

 

Low covariance is important in reducing risk.  We may not get expected return if the observations are not independent.

In the Law of large numbers, which is another stat concept– although there are a lot of independent shocks if they are independent, there is not much risk.   Variance goes to zero as n goes to infinity.   Insurance relies on this.

Value at Risk  VaR  was invented in 1987 to measure corporate risk.  Companies would calculate that there is a 5% probability   of loosing a million dollars.  It was found not to work well in 2008.

CoVar  was invented by  Brunnermier at Princeton.  It is  Value at risk of financial institutions conditional on other institutions being under distress.  This is supposed to be a newer more accurate model

Majority rule can be a good way to decide the better of two options.  Intrinsic justifications do not concern themselves with the quality of the decisions.  Voting outcomes can track truth if three conditions hold.  The voters are better choosers than random, are independent, and they vote sincerely.    One problem is that people  have preexisting cultural mindsets which determine how they look at information or even what new information they consider.   Only ten percent of people can explain what nano-technology is but 80% have an opinion on how safe it is.  Page argues that good decisions depend on sufficient cognitive diversity of the group or having people use different models to arrive at a solution.   A  smart diverse group of people is needed to get to the right answer.      

I am not sure how this ties to religion or even political parties, which encourage uniformity of thought.   Most people do not choose their political party or religion.  

 Shiller Finance Lecture

 wisdom of crowds

Scott Page wisdom of crowds

Eggspression APP

Our free App came out this week.  If you have an I Phone, try it

I tunes Eggspression

Travels

More travels.  Went to Krakow and Prague.  In the 19th century most of the worlds Jews lived in this part of the world.  Now it is a museum.  My grandparents and father came to America from a small village near Gorlice, Poland.  There is a plaque in the town square in memory of the Jews who used to live there.   The town still looks similar to they way it was in the 1800s.   The land where his father had a farm is still farm country but there are no remnants of any Jewish community.   Countries change.  

  Wooden bridge near Owczary near Gorlice

Gorlice

Trip to a town near Owczary

Return trip to Rwanda Having been there in 2010 on a Group Health Medical CME tour. It was interesting to return and see the changes. Rwanda is a beautiful country with a temperate climate and friendly people. A former Group Health doctor , who adopted a Twa village and has been returning regularly, organized the trips. Since the last visit the village has been moved off the side of a hill where they lived in mud huts with leaky thatched roofs to more typical brick Rwandan housing and given land to farm and raise cattle. The kids are able to attend school and look much healthier. At the last visit they were malnourished and we were supplying peanut butter supplements. Now they look fed. The villagers create crafts and continue to perform their traditional dances.

Kigali was clean, safe, and easy to get around. There are very nice restaurants and we ate well. We spent one afternoon at the genocide museum. Considering this only happened in ’94 perhaps, not by choice, they have moved on. There seems to be the same process of dehumanizing a group and then organizing the killing for all genocides. Rwanda commemorates its genocide for 1 week each year in order to facilitate healing.

 Pretty much everywhere we visited was farmed. A person we met from the African development bank told us that agriculture has been one of their successes.

 This trip we went to see the gorillas and they were quite entertaining.

 Protected from poachers, they see to lead a nice life eating plants and insects and climbing thru the forest. We met several nice people who are an example of the many that are involved in their preservation. We also visited Akagera National park. Highlights included a leopard in a tree, hippos, giraffes, and antelope. We stayed at the Ruzizi Lodge. The neat thing about sleeping in tents is you hear all the animals through the night. John Walton from Wal-Mart had helicoptered in and stayed 4 days prior. From there, we took a boat trip and saw hundred of birds that habitat the shores of Lake Ihema. I kept my limbs in the boat as they told us that a crocodile had recently killed a fisherman.

 Banking is still primitive, as we had to bring new $100 to cash into Rwandan Franks. Only Visa cards are accepted at a few places. Internet was more available then last time and faster. Service is still a bit random. I had no hot water for 3 days in my hotel, but had the internet. Others had hot water but no internet. Since they are trying to improve their tourist economy improving service is a government priority. We got to meet the Rwandan bicycle team which was started by Jonathan Boyer. It is good for the country to have representation in the Olympics.

 Healthcare is provided to most through government clinics, which feed to hospitals. Everyone is insured. They are still at the level of treating infectious diseases mostly, TB Malaria and HIV. Chronic diseases such as diabetes or heart disease are just starting to appear. One of our group was just working on introducing hospice services. Infant mortality is high. The Rwandan government spends 9% of its budget on healthcare. Many NGOs also contribute. Rwanda is clean both physically and non-corrupt country that is making progress in improving life for its people. Hopefully they can continue through good government and education.

 Also got to spend a few days in Amsterdam. It was the opposite of Rwanda; freezing, brown, flat as a pancake with canals everywhere, almost everyone gets around by bike, well thought out planned architecture, old, technologically advanced, coffee and beer oriented, wealthy, egalitarian, democratic, educated, etc. I stayed in Slotermeer, which seems to have become Turkish and has a large outdoor market and lots of restaurants. The Baklava was good. The 7 and 14 tram were easy to take to the city center where I saw Ann Frank house, Hermitage –Amsterdam - where they seemed to have the Van Gogh museum, Jewish Museum and the historic In de Olofspoort. Also attended a meet-up and worked on a 3d bioprinter . The country is linked by bike trails and I was also able to bike to the coast one afternoon.

How we got to our current Healthcare System.

American Health Care is an ecosystem, which evolved rather than a planned system. It is a crazy quilt, which covers most Americans.  

 Planned healthcare systems include those of Rwanda and Taiwan (1995).   Unlike in the US, in which entrenched opposition by rent seekers has prevented reform, the 1994 upheaval and its relative poverty let  Rwanda start from scratch.   The British created their National Healthcare system in 1948. Prior to this they had a patchwork system in which employees were covered but not their dependents.  Canada developed its Medicare system in 1968. 

With evolution some species are efficient and some are not. 

And healthcare is complicated

Events in American Healthcare

1798 US Marine Hospital for Seamen was founded by the government.  It was the first American socialized medicine.

1846 the American Medical Association was created.  Healthcare was very primitive and there was no system.  People hired their doctors who could do little. 

The American Healthcare system evolved after WW2.  Before WW2 people paid for the doctor's service and hospitals were run by churches and charities. 

1900 Aetna Life insurance offered health coverage for disability from disease except TB, VD, insanity, or disability due to alcohol or narcotics.

1904  - the first workman’s compensation Law in Maryland was declared unconstitutional.  The AMA counsel on medical education standardized the education for doctors and by 1910 had organized half of American doctors.

In 1911 Theodore Roosevelt campaigned on creating a national health insurance system and lost.

In 1912, the College of Surgeons sets standards for hospital accreditation.  Health insurance companies defeated state attempts at universal health insurance.

In the 1920s healthcare was medieval.  It consisted of lotions that did not work and was a trivial part of ones budget.  In 1900 the average annual healthcare budget was $5 was spent, which would be $100 today.  2.9% of the family budget was spent on sickness and death. 

Hospitals were poorhouses where the indigent went to die usually started by Churches .  They were non profit.

1920 – 29  effective medicine, antibiotics became available and hospitals became a place to have babies.

By the late 1920s hospitals had empty beds. People spent more on cosmetics than medical care. 

1927 President Coolidge convened a committee to address growing health care crisis in terms of access and cost.    Heart disease became and still is the leading cause of death.

1929  Baylor Hospital started a subscription service and in the depression it became popular and was known as Blue Cross. But not many people bought it .  The first HMO was founded in LA

In 1935 Social Security was passed providing economic support for the elderly.  At AMA’s insistence national healthcare was removed.  

1935 - WW11 wages were limited and employers used fringe benefits to attract workers

9 % of population in 1940 went to 63% in 1963.   People with good jobs got care through work, and everyone else looked to government.  Costs were spread over a large group. 

1939 California Physicians service became the basis for Blue shield, a prepayment plan for physician’s services.

1040 Penicillin came into wide use and 12 million of 132 million had health insurance.

1943 The IRS rules employer based healthcare to be tax free 

1945  President Truman supported national health insurance but it failed after being portrayed as communist. 

Medical care is fee for service, as pre-paid plans are barred by most states. Since for profit insurance companies are permitted to charge lower premium for the healthy they overtake Blue Cross. 

1960 to 80 medical school enrollment doubled and the number of specialists increased.  There are 700 insurance companies In the US.

In 1965  Medicare and Medicaid were introduced.    Physicians could price discriminate.   Medicaid covers health and long-term services for 59 million low income Americans most being working families.  The sickest 1% make up 25% of spending.   Medicare covers hospital and drug cost for those over 65.  By now 6.6% of the family budget was spent on healthcare.

1969 Nixon announces a healthcare cost crisis healthcare spending is 7.1% of GDP and by 1973 HMO act is passed Enrollment only reaches 10 million.

1980 DRG payments.   From ww2 to 1980 most doctors were fee for service in private practice.  After 1980 capitation spread.  Hospitals use price discrimination.

1980 – 90 Healthcare cost continued to rise.  The country moved to manage care which fixed cost.

Corporations begin to buy up hospitals hospitals.  In 1983 President Reagan changed to a DRG system which fixed payments to hospitals by disease.    Congress expanded drug company rights through  increased patent protection.   By 1990 drug company profits were 25% of revenue. 

1993 President Clinton proposed a national health insurance.   This was the 8^th attempt at national healthcare and was also defeated.

1997 drug companies were allowed to advertise directly to consumers.  US  life expectancy reached 77 years and healthcare spending 14% of GDP

2000 President Bush signs the Medicare Prescription Act covering drugs.  Healthcare cost reach 16% of  gdp.  62% of workers participate in employer health plans.  Only 57% of children covered through their guardian’s health plan

Insurance companies merge resulting in 3 for profit and 2 non-profit controlling 90 percent of the market.

 By 2010 Spending reaches 2.6 trillion.

The US relies on doctors and hospitals to provide care.   

In 2014 the affordable care act will require all people to have health insurance.  Those who don't get it though their employer or a government program would be required to purchase it on their own or through an insurance exchange.

2010  - Over considerable opposition the Affordable Care Act is  signed and in 2012 the Supreme Court declares it constitutional.

Healthfair for the uninsured.

The Bottom Line: Healthcare from Softbox on Vimeo.

At the Affordable Healthcare Conference at Virginia Mason

Dan Berwick spoke about using science as a basis for medical decisions looking out globally to see where US healthcare ranks, and learning in large systems.   Provost notes it is studies that make it possible to learn and improve performance.  Without feedback there is no improvement.  Knowledge begins and ends in data, but there has to be some change in the middle to learn.  Enumerative type studies are done when conditions are stable whereas an analytic study is done to improve a process.   

VM’s CEO Gary Kaplan pointed out that most important outcome is return to function and importance of also evaluating the patients experience.   The Everett Clinic’s CEO Rick cooper spoke of reducing cost by 25%, reaching 90% generic Rx, and the 49% rule is when you don’t believe 49% of what you peddle.  And Group Health’s CEO Scott Armstrong spoke about the changing incentive system.  Mark Mora from GHC spoke about the value of having patients actually make informed decisions after they have watched a video.  In American medicine this is revolutionary.  

The story of Andy Groves Prostate Adventure 

Nobel prize winner Bernard Lown, MD has shown that half the stents inserted are unneeded.  Some hospitals compete on quality and some on quantity. 

http://bernardlown.wordpress.com/2012/07/31/the-coronary-artery-entrapment/

We need to take the greed out of healthcare citing the patenting of colchicine, payments for EPO.  It is pernicious and worse than theft.  The should be the minimum moral standard. 

 We heard that innovation needs to prove itself.   Washington State created an office to evaluate new technology for effectiveness which was vilified in an editorial in the Wall Street Journal for not approving a new technology which happened to kill people.   Interestingly this office was instigated by radiologists, who were threatened when the ENT docs were starting to purchase MRIs to scan sinuses.  Developers of new technology should have to prove its effectiveness before they sell it. 

Another problem in lowering costs is that the guilds are protecting their turf, preventing health workers for working to their full capacity.   In business jobs flow to the lowest skilled ie. McDonalds.  In healthcare that is blunted.

The discomfort with talking about caring for the poor, talking about comparing our healthcare with other countries (Rwanda has 98% of its citizens insured), discussing end of life care leads to a system which serves the medical industrial complex but not its users.

Berwick says America needs to have a civil discourse.    Calling scientifically graded decisions  government run medicine is priming which is meaningless in debate. 

Speaking of government the Alaska Federal Healthcare Network  provides remote medicine throughout  the state of Alaska.  The feds are so smart in Palin country.

A most interesting  talk was by Rich Onizuka, CEO of Washington’s Insurance exchange which is to come online 10/14.   It has taken 3 years to set up.  Only 19 states have taken the challenge.  He likened this to creating Turbotax.   The best part of Obamacare was that up to a certain income your health insurance will only be up to 2 % of your income.   The plans will be rated by the percent of medical loss so you can compare.  If you are a web developer making  $40000 a year you will only pay 2% for your income for healthcare.  

Washington Healthplanfinder 

Wisdom of Crowds

  Scott E Page  - Coursera  The Diversity Prediction Theorem

Where does collective wisdom come from?

People make predictions based on different models.   We know more accurate individuals lead to more accurate predictions. 

However, in addition, a more diverse crowd leads to more accuracy.

Example :

Amy predicts 10   error (10-18)^2  = 64

Belle predicts 16   error  (16-18)^2 = 4

Carlos predicts 25 error (25-18)^2 = 49     

Average error = Total error/3     = 117/3   = 39

Average value is 17

Actual value is 18

How accurate is the crowd?  Crowd error  =  (17-18)^2 = 1

Diversity

Amy   (10-17)^2 = 49

Belle  (16-17)^2 = 1

Carlos (25-17)^2 = 64

Average diversity = 114/3 = 38

 Because 

In the example the crowd error 1= the average error 39 –  the diversity 38

For the wisdom of crowds to occur the crowd error needs to be small or it is not wisdom.  The average error needs to be large or it is not a hard problem, so the diversity must also be large.   The diversity comes from people using different models.   Individual ability and diversity are equal partners.

The Madness of Crowds comes from like-minded people that are all wrong.

Large CE  + Large AE – Small diversity

Fire Time  - At sunset, for those on Puget Sound looking east it appears that Seattle is burning.

 Innovation

The percolation modelof innovation.  With each coin flip each square has a chance of turning grey: % P.   Innovation occurs when there is a continuous path from top to bottom.   It is not until P > 59% that there is a tipping point and a huge increase in innovation.   This is why often there are several inventors competing to see who can be first.  To have innovation society needs to support the research that turns the squares grey.

 

The Solow growth  model based on labor and the use of machines shows that without innovation growth will level off

 Without innovation:

 

However the innovation multiplier  A makes labor more productive.   Government support that promotes innovation  includes government that is strong enough to protect property rights so people will invent,  Government that is weak enough not to take all the spoils,  and government and cultural support of cooperation. Trust varies in different cultures.