The Martingale strategy was a method of placing bets that was popular in 18th century France. The principle is simple. In a game of flipping coins, the odds are 50-50 of wining. If you win, you take your money and bet again. If you lose, you double your bet so that on the next flip you will get all your money back, plus a profit. The odds are 100% that you will never lose and you might win, but only if you have enough money to weather a very long streak of bad luck. If you bet a dollar and lose you have to bet $2. If you lose that you have to bet $4, then $8, and you can see that if you hit a bad streak, you will have to cash out before the Martingale can work for you.

There is also something called an ant-martingale that suggest that luck comes in streaks, so when you win, you double your bet because you may be in a lucky streak. This, of course, is dependant on the game.

Hedge funds use Martingale and ant-martingale strategies to make bets on the movement of stocks and commodities and they hedge their bets with different bets in other sectors make limiting bets on the same object. These strategies work for the simple reason that in the long run the probabilities will usually pay off. By making martingale bets to cover failed bets, the hedge funds were certain to survive temporary dips or movements of stock outside of their predicted probable ranges.

Then there comes a time when the limiting factors of the Martingale take over. All it takes is a prolonged run of bad luck or the value of stocks fluctuate outside of their predicted model for a long period. The bet maker, in this case the hedge fund manager, reaches a position where he cannot make a big enough bet to cover all of his losses so he has to make the best bet he can and liquidates some of his assets to do it. The liquidation of assets to cover large bets drives the market down further and other hedge funds must liquidate to cover their bad bets. All the Martingale strategists fail together, because they were all betting the same game.

Crash-Boom.

I remember when my Math professor showed me the very simple solution to the Martingale strategy and why it will always fail. The math was easy and obvious. I enjoy a game of chance, but I won’t bet more than 25¢ on anything and I don’t ever expect to make money gambling. The proof my professor showed me makes it obvious that any repeated bet will eventually crap out. There is no such thing as a sure thing. All bets, no matter if they are a sure thing are not, eventually fail. This includes life bets, like love, and career bets. As John Maynard Keynes said, “In the long run, we are all dead”.