You’ve got to know when to fold ’em!

I really didn’t think I’d have to write again about gamblers who don’t understand risk after addressing it here and, to some extent, here, but then I stumbled on the story of Jim McIngvale, aka Mattress Mack.

Mattress Mack owns a furniture chain in Houston called Gallery Furniture. You may guess where this is going. Yes, Gallery is one of the bevy of furniture stores that offers free furniture if the local sports team wins a championship. I believe the original was Jordan’s in Boston (more on them below) but there are many others. But none of them have gone to the extremes of Mattress Mack!

Strike One

Mattress Mack’s first sports promotion was for Super Bowl 48. He promised free furniture to anyone who spent more than $6,000 if the Seahawks won. The Seahawks won and he lost $9M (the original story estimated $7M but Mack said it was actually $9M in the new story).

Often, retailers will protect themselves through insurance. Jordan’s took out a $20M policy to protect itself from a Red Sox World Series in 2007. If memory serves, they bought it from Ajit, which one could argue was really just transfer accounting given Berkshire owns Jordan’s. Still, at least they bought something.

Not so, Mattress Mack! When asked why he didn’t buy insurance, he responded that he’d rather take the gamble. In this case, he gambled…and lost!

Companies usually protect themselves from losing big money through promotions like this by taking out insurance, but McIngvale said the gambler in him prevents him from doing that.

ESPN. Store Loses $7M With Seahawks Win

Strike Two

In 2017, Mack was back for more. This time he was giving away mattresses if the hometown Astros won the World Series. He lost, again! This time he was out $13M!

But Mack was smarter this time! He apparently bought some insurance. When he realized the outcome might still go against him, he went to Vegas and put $1M on the Astros to win to help reduce his remaining exposure and supposedly cut his net loss to $1M.

So Mack learned from his mistakes and never offered a foolish promotion again, right?

Strike Three?

Wrong! Mack offered another Astros promotion this season. This time he decided the insurance was too expensive and went naked. The Astros finished with the best record in baseball. He is on the hook for potentially $15M!

So what is Mack doing? He is back to Vegas and this time is swinging big. He is looking to bet $10M on the Astros. If he wins, he will get $20-25M (he is getting odds between 2-1 and 5-2). This will actually make him a $5-10M net profit. Of course, if the Astros lose, he is out the whole $10M. It seems like Mack has gone beyond hedging and flipped net long!

The Odds of Winning

Mack claims it was too expensive to hedge his bets earlier in the year. I’m not so sure. I think he just likes to gamble, as he says.

In spring training, the Astros were 7:1 to win the World Series. So for $2M, he could have eliminated his risk. My guess is an insurance policy would have been a similar cost.

Today, while the Astros are the favorite, they will likely have to beat the Yankees to make the World Series and possibly the Dodgers to win it (I’m assuming they beat the wild card though that’s clearly not a given).

If you assume, simplistically, that both of those series are coin flips, then the odds of the Astros winning the title are 25%. If you want to say they are 60% (which is pretty optimistic for baseball) and 75% in the wild card round, this would suggest a 27% chance of the Astros winning. This actually squares with the 27% in the 538 model.

The Expected Value Math

Let’s look at whether the bets have improved Mack’s situation. First, let’s look at what would happen if he did nothing. His expected loss is $4M. 73% of the time he escapes with no loss vs. 27% of the time he loses $15M.

Now, let’s add in the wagers. Assume his bets average out to odds of 2.2 to 1. If there is a 27% chance to win, by adding his “hedge”, 73% of the time he now loses $10M (his gambling premium). The other 27% of the time he makes $7M ($22M winnings – the $15M he owes to customers). His expected value is a loss of $5.4M.

That’s right, he is making things worse with his hedge (since -$5.4M is worse than -$4.0M)! Normally, we would say well, yes, the expected value is worse, but that’s the price of reducing the tail risk. True, but…

He did reduce his tail risk from $15M to $10M buthe increased his risk of having a loss from 27% to 73%! He is now far more certain to have a loss and, it is still a large loss at $10M!!!

How did this happen? Because he wanted to give himself a 27% chance to make $7M! This is not a hedge, it is a gamble. After all, Mattress Mack says the gambler in him prevents him from hedging!

What Have We Learned?

1. Mattress Mack shouldn’t offer championship promotions.
2. That probably won’t stop Mattress Mack from continuing to offer free furniture promotions in the future.
3. We should all make a trip to Houston for the next promotion and buy some free furniture.
4. Mattress Mack should buy insurance or, at least, lock in his wagers pre-season when the odds are better.
5. Mattress Mack likely won’t hedge next time either.

What Haven’t We Learned?

How Gallery Furniture is still solvent.

Postscript: Coming Now, Coming Soon, and a Presidential Prediction

I’ve added a new “best of” feature you can find at the top of the page for newer readers or anyone who is feeling nostalgic about old entries.

Later in the week I will have a post on the future of auto insurance distribution.

For those who are interested in making better wagers than Mattress Mack, I found two really interesting long shot bets in the UK markets for the 2020 election.

If you believe impeachment is coming, you can get 80:1 odds on Pence being the next President. If Trump goes, this drops to even money so the market is saying there is only a 2% chance Trump is impeached.

The other interesting long shot is Bloomberg at 200:1. When we last left the former NYC mayor, he was announcing he wouldn’t run, which was code for he wanted to boost Biden’s chances.

A month later though a little noticed story was published on Axios suggesting he could change his mind if Biden slipped. Given the stories about big Wall Street Dems looking for an alternative to Warren, how long before Bloomberg changes his mind? Buttigieg and Harris are in the 20-30:1 range. Bloomberg is just as likely as either of them.