A Lattice of Gambles

TL;DR

This paper explores the theoretical limits of gambling strategies using Lorenz curves and martingales, showing how fair gambles cannot improve inequality measures and proposing efficient methods to transition between distributions.

Contribution

It connects economic inequality concepts to gambling theory, providing proofs and constructions relating Lorenz curves, martingales, and gambling efficiency.

Findings

Fair gambles cannot increase the Lorenz curve.

Any non-increasing Lorenz curve sequence corresponds to a martingale.

Private randomness can reduce the total money placed in gambles.

Abstract

A gambler walks into a hypothetical fair casino with a very real dollar bill, but by the time he leaves he's exchanged the dollar for a random amount of money. What is lost in the process? It may be that the gambler walks out at the end of the day, after a roller-coaster ride of winning and losing, with his dollar still intact, or maybe even with two dollars. But what the gambler loses the moment he places his first bet is position. He exchanges one distribution of money for a distribution of lesser quality, from which he cannot return. Our first discussion in this work connects known results of economic inequality and majorization to the probability theory of gambling and Martingales. We provide a simple proof that fair gambles cannot increase the Lorenz curve, and we also constructively demonstrate that any sequence of non-increasing Lorenz curves corresponds to at least one Martingale. We next consider the efficiency of gambles. If all fair gambles are available then one can move down the lattice of distributions defined by the Lorenz ordering. However, the step from one distribution to the next is not unique. Is there a sense of efficiency with which one can move down the Lorenz stream? One approach would be to minimize the average total volume of money placed on the table. In this case, it turns out that implementing part of the strategy using private randomness can help reduce the need for the casino's randomness, resulting in less money on the table that the casino cannot get its hands on.