Exchanges, bubbles and central banks · 1600s–1790s

1654

Pascal and Fermat work out the odds

Two mathematicians solve how to split the pot in an unfinished game, and probability theory is born.

In 1654 Blaise Pascal and Pierre de Fermat exchanged letters about the 'problem of points': if a game of chance stops early, how should the stakes be shared? Their answer weighed each outcome by how likely it was.

That idea, the expected value, underlies insurance, finance and every casino. A bet's expected value is what it pays on average; the house sets the payouts so the player's is always a little below what they stake.