Variance and Streaks

Variance

Variance is the average squared distance of results from their mean; its square root, the standard deviation, is the typical distance in the original units. per trial

Expected value locates the centre of a distribution. Variance describes how far individual results sit from that centre. Both are needed, because a bet with a small negative expectation and a wide spread can produce long stretches of results that look nothing like its expectation, and a bet with the same expectation and a narrow spread cannot.

Working the per-trial figure

Take the even-money wheel bet: one unit staked, returning +1 with probability 18/37 and −1 with probability 19/37. Because every outcome is +1 or −1, every squared outcome is exactly 1, which makes the arithmetic short.

mean          m  = (18/37)(+1) + (19/37)(-1) = -0.027027

mean of X^2      = (18/37)(1) + (19/37)(1)   =  1.000000

variance         = 1.000000 - (-0.027027)^2
                 = 1.000000 -   0.000730
                 = 0.999270       per trial

standard dev.    = sqrt(0.999270) = 0.999635 units

How the two quantities scale

Across n independent trials the expected result multiplies by n, while the standard deviation multiplies only by the square root of n. That difference in growth rate is the whole of the long run.

trials       expected result      typical spread     ratio
    100          -2.70 units          10.00 units      0.27
  1,000         -27.03 units          31.61 units      0.86
 10,000        -270.27 units         100.00 units      2.70
100,000      -2,702.70 units         316.23 units      8.55

At a hundred trials the spread is nearly four times the expected loss, so finishing above the starting point is entirely ordinary. At ten thousand trials the expected loss sits 2.70 standard deviations below zero and finishing above the starting point has become distinctly unusual. At a hundred thousand it is 8.55 standard deviations below, which is no longer a close question. Nothing about the game changed between those rows; only the count of trials did.

Related entries

Standard deviation
The typical distance of a result from the average, growing with the square root of the count of trials.VARIANCE AND STREAKS
Long run
The count of trials at which expected loss grows large relative to the spread of results around it.VARIANCE AND STREAKS
Streak
A run of identical consecutive results, whose probability falls geometrically with length but which is ordinary across many trials.VARIANCE AND STREAKS
Volatility
How widely a game's results spread around its return, set separately from the return itself.VARIANCE AND STREAKS
Gambler's ruin
The result that a player with finite funds facing a negative expectation and unlimited trials is eventually certain to reach zero.VARIANCE AND STREAKS
Bankroll
The total amount set aside for play, against which the spread of results over many trials is measured.VARIANCE AND STREAKS