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Bounds on Gambler's Ruin Probabilities in Terms of Moments

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Abstract

Consider a wager that is more complicated than simply winning or losing the amount of the bet. For example, a pass line bet with double odds is such a wager, as is a bet on video poker using a specified drawing strategy. We are concerned with the probability that, in an independent sequence of identical wagers of this type, the gambler loses L or more betting units (i.e., the gambler is “ruined”) before he wins W or more betting units. Using an idea of Markov, Feller established upper and lower bounds on the probability of ruin, bounds that are often very close to each other. However, his formulation depends on finding a positive nontrivial root of the equation φ (ρ )=1, where φ is the probability generating function for the wager in question. Here we give simpler bounds, which rely on the first few moments of the specified wager, thereby making such gambler's ruin probabilities more easily computable.

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Authors and Affiliations

  1. Department of Mathematics, University of Utah, 155 S. 1400 E., Salt Lake City, UT, 84112, USA

    S. N. Ethier & Davar Khoshnevisan

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  1. S. N. Ethier
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  2. Davar Khoshnevisan
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Ethier, S.N., Khoshnevisan, D. Bounds on Gambler's Ruin Probabilities in Terms of Moments. Methodology and Computing in Applied Probability 4, 55–68 (2002). https://doi.org/10.1023/A:1015705430513

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  • DOI: https://doi.org/10.1023/A:1015705430513

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