In financial markets, the word volatility is used as a measure of the variation of the value of an investment. In casino gambling, the word refers to the ups and downs of winning and losing. Because of the way most casino games are designed, it’s possible to be up by a lot one minute and way down the next. These bets are considered volatile.
I read a good analogy once that explained the concept to me really well. Think of an ocean. An ocean sometimes has small waves that barely crest, average-sized waves, and large waves that crash against the shore. Think of volatility as a gauge of how overall choppy the water is over the course of a day.
Before you go thinking that volatility is a bad thing, understand that the mechanics of it are a huge part of the appeal of gambling. This article explains how the concept of volatility works in casino gambling.
Volatility vs. House Edge
Most of the gamblers I know (and most of the gambling articles you’ll read online) focus primarily on the house edge. The house edge is the casino’s profit as expressed as a percentage of a player’s bet. It’s an important number to know, but it has nothing to do with volatility or win frequency.
The Two Sides of Volatility
This concept refers to changes in your bankroll over time.
Volatility has two sides – the player controls one when he chooses the size of his bets. We refer to the practice of controlling this aspect of a game’s volatility as “money management.”
The second part of volatility is the natural swing in results over time. This is by far the more important part of volatility, the point at which the game determines whether your bet is multiplied and returned to you, or lost.
We can identify games by their volatility. A coin-flip, which has two possible results and pays 1:1 to the winner, is a low volatility game, because you have a 50/50 chance of winning and losing each time. Wins aren’t big, but losses aren’t big, either. Single-number bets on roulette are high volatility wagers, because both the potential for losing and the potential for winning are high.
Some Examples of Volatile Games
The trouble with volatility comes when some games (mostly table games) are way more volatile than they appear. The most catastrophic end result is that you may underfund your bankroll and be at risk of busting out way before you intended. Highly volatile games are excellent at wiping out bankrolls.
To explain how some games are more volatile than others, let’s look at a few specific casino contests.
Baccarat is a heads-up competition that’s the closest thing you can bet on to a coin flip in a casino. That’s because both the player and the banker win almost fifty percent of the time. Since the payouts are 1:1 for the player and 0.95:1 for the banker, it’s obvious that this is a low volatile game.
Caribbean Stud Poker
Here’s an example of a game that’s volatile through and through. The fluctuations you’ll find in Caribbean Stud Poker are a sure sign that the game is volatile. Some hands win up to five base bets at a time, and then there’s the highly-volatile $1 progressive side wager. It sounds like an expensive game for the casino, right?
Check the pay schedule. The bottom of the pay schedule is designed to increase the house edge. Also, the game itself is designed to reward occasional big wins despite the fact that the majority of your Caribbean Stud Poker hands are losers.
The game tricks you into thinking it is a low volatile contest, because you make up for those regular losses with random big wins. This is a common theme among highly-volatile casino games.
If you know much about gambling strategy, you may be surprised to see blackjack on this list. After all, the game has one of the lowest house edge figures of any in the casino – just 0.5% when played with perfect strategy. But once again, a low house edge does not mean a game isn’t volatile.
Without using perfect strategy, the dealer holds a five percent edge in terms of win frequency. You can reduce that edge by doubling and splitting appropriately (according to basic strategy), and if you’re playing at a good table, you’ll earn extra payouts for natural blackjack which also reduces that edge.
The problem is, in order to reverse the dealer’s advantage, you have to risk extra chips by doubling down, risk larger losses through splitting, and waiting for those natural blackjacks to produce big payouts. In other words, you’re hoping for big wins to wipe out your multiple losses, which is the definition of volatility.
Strategy for Playing Volatile Games
The first trick to playing well at high-volatility games is to identify them. The easiest way is to find a game that pays large jackpots and other big payouts. Generally, the more variation between the game’s top prize and its bottom prize, the more volatile the game is.
The second trick – manage your bankroll and know what highly volatile games are good for. Don’t think of playing a volatile game as a waste of money – volatility is really just an opportunity for you to earn a huge payday, though it requires a larger bankroll if you’re going to chase that jackpot. Because some games (craps, slots, roulette) allow players to make multiple bets at the same time, you need to adjust your bankroll to suit.
The third trick – remember that volatility works backwards as well. Most volatile games pay out large and infrequent prizes, but others pay regularly in small pieces with occasional big losses. The best example would be the lay bet in craps. Don’t think there is anything wrong with this type of wagering – the only downside is that you’d need a massive bankroll to cover your bad losing streaks. Risking a lot of money to chase small wins doesn’t make sense.
Another way to look at volatility as it applies to gambling is to think of it as the average difference between a gambler’s end result and the game’s house edge. If the difference between the two are small, the game has low volatility. If the difference ranges from being broke to winning massive jackpots, the game has high volatility. Remember – a highly-volatile game does not mean a “bad game,” it just means you should approach it with a different betting philosophy.