Risk of Ruin Explained

Risk of ruin is a heavy topic; however, as a gambler, it is something you should be aware of. While it is a mathematical improbability, it can happen, and sometimes does, to gamblers just like yourself.

Risk of ruin is the mathematical probability that you will lose so much money that you will be unable to recover. While many individuals associate the risk of ruin with a zero balance in the bank, in modern times, it can be something even worse. Read on to learn everything you need to know about risk of ruin and how you can work to avoid it.

What is Risk of Ruin?

Risk of ruin is the idea that you could lose so much money that you would be unable to recover. It doesn’t just apply to gambling, however, as it can also apply to investing and any other risky pastimes that deal with putting large amounts of money on the line with no guarantee of return.

It is important to note that risk of ruin isn’t just losing so much that you rage quit; it’s losing so much that you can never recover what you have lost, and you are likely unable to continue at the current point in time.

Understanding Risk of Ruin

The reality is, it is a challenge to understand the risk of ruin, as it is a loss so deep and so profound that humans have trouble imagining it. Sure, if you lose your entire savings, it will be hard to continue playing that night, but if you still have a job, it is likely you can build the savings up again if you are given enough time. While no one likes to imagine this (and it may seem like a huge catastrophe), it is recoverable and is therefore not considered ruin.

Risk of ruin is something far more devastating; it’s a hole so deep you can’t climb out. It is most often associated with gambling so much that you lose your savings, house, car, and job. Not only that, but you may take on so many debts that you have to declare bankruptcy and lose your credit score too. Risk of ruin may sound insane, but it has happened to gamblers just like you—leaving many homeless and ill—and without a way to ever recover what they may have once had.

How to Calculate Risk of Ruin?

Have you ever heard the saying that the higher you climb, the further you can fall? This is true with risk of ruin, and it isn’t calculated the same for everyone. Rather, it is a probability based on your value at risk and a number of other variables, which will depend on your exact financial situation and which risky behavior you are engaging in.

Without knowing your exact situation, we can’t estimate it for you now, but what we can do is let you know that it is generally based on capital, so if you have a high amount of capital, you have a high chance of risk of ruin.

How to Lower Risk of Ruin

Of course, no one wants to ruin their entire life over a fun night out, and we promise that the average gambler is unlikely to ever see a loss this devastating. However, if you want to lower your chances of an eventual ruin, here are some strategies you can implement.

1. Always Gamble With a Daily Limit

One of the best ways to keep yourself from losing everything is to always have a daily limit when you head to the tables. It can be large or small, but it should be an absolute limit, meaning when that money is gone, so are you. You’ll have to try your luck another day.

While this is slightly more difficult with risky investing, it can still be done, just differently. Instead of a daily limit, you should set a percentage of your portfolio limit, ensuring only part of your assets are ever in the highest risk categories—no matter how good of an investment something may seem.

We also recommend avoiding futures, which make it easy to gamble more than your current assets and can quickly increase your risk of ruin if you aren’t careful.

2. Ask For Advice

As a gambler, we don’t mean this literally; rather, we mean you should always gamble with a friend and ask them to help you stick to your self-imposed limits. Of course, choosing the right friend is important, but gamblers who face the risk of ruin most often do so alone, having already cut ties with all of their friends because they tried to tell them to stop.

As an investor, this means having an advisor, or friend you trust, to run large and risky investments by before you place them. The hardest part of this is trusting them when they say no to something, but trust us, they just have your best interests in mind and are probably right.

3. Measure Your Performance

In the middle of gaming, it can be hard to see that you’ve lost more than you’ve won, especially because games are designed to bait you with small wins here and there, even if you are mostly losing. We recommend having a method to truly track your performance, whether that be tick marks on a notepad or playing online where you can track each spin—so you can be aware of your actual situation at any given time.

This also means saying no to alcohol, and considering a cash bankroll to ensure you only spend the amount you specified in tip one.

This is easier said than done with investing, but we recommend purchasing a tracking tool for your portfolio, especially if you aren’t good at tracking yourself, so you can know exactly which investments are making you money and pull funds from any dead-weight investments before it is too late.