Gambling today is flawed

Gambling is very much part of the human condition. We gamble with aspects of our lives every day, risking for the chance of reward in a plethora of forms.

Yet games that incorporate gambling for real money are fundamentally flawed. The odds are stacked so overwhelmingly against the player that it is not much of a gamble at all – it is really just a facade for systematically draining money from players to the house under a thin guise of a real gamble.

Consider the maths of it all, as a closed system.

There are two main parties in gambling: the house (casino, lottery etc.) and the player. 

Ultimately, all of the money put into the system is from the collective pockets of the players, in the form of bets (or wagers, or ticket buys – all amounting to the same thing). The house takes a portion of every player bet, and puts it into its own pocket. The rest (of the players’ money) from the bet is returned to the player in “winnings” or payouts. But really, it is just the change that is left over after the house takes what it wants.

This portion taken by the house from each and every bet is called the house margin, house edge, the keep or the hold. This amount is immediately removed from the ecosystem, taken as profits or distributed to any of the other sub-parties related to the house – financial institutions (banks, credit card companies), regulatory authorities (government departments, auditors, licence regulators), gaming technology and service providers, or to marketing the gambling product to attract yet more eager players.

Take for example, the Powerball lottery – where the house edge is a staggering 50%. Fortune Magazine gives us a rundown of where that money goes:
* 50% is returned to the players, in winnings
* the retailer of the ticket takes 5%
* another 5% goes to administration
* and 40% goes to taxes of some sort (state general funds, education, elderly, property taxes).

The problem with this model is the churn. The whole system isn’t a single-cycle one – players don’t just buy one ticket ever, and so they don’t lose *just* half their money to the house. What is actually happening with churn is that the total player bankroll, or sum total of funds in all players’ pockets is halved per cycle. For each and every cycle.

For the Powerball lottery at a house edge of 50%, let’s see how this plays out with collective $100M to start with:

[table id=Powerball /]

So it takes just 5 cycles for almost 97% of the players’ total bankroll to leave the ecosystem entirely, in the form of fees, taxes, admin and profit, leaving just 3.1% in the pool to possibly be returned to players in the form of winnings. So in it’s simplest form, if a lottery ran on a twice-weekly cycle, and the full set of players bought tickets with their full bankroll for each draw, they’d all collectively be left with just over 3% of what they started with in just 2.5 weeks!

Of course, the reason these heavily house-advantaged games continue to thrive is that the players don’t just stick with their starting bankroll from Cycle 1 – instead they continue to reach deeper and deeper intro their pockets introducing more external money to the ecosystem and ending up only further bolstering the coffers of the house.

The margins may look a lot better on casino games (slots, roulette and other table games), but their house-advantaged effect is still as effective in draining player pockets as the lottery games examined above.

Public figures such as this study by the University of Nevada, Las Vegas  (stats to Oct 2017) which largely concurs with this one from the excellent Wizard of Odds show that average hold on slot games in your typical casino would sit around 7% – a far cry from the 50% hold of lottery games. While this might seem like a much better deal, that devastatingly effective tool of the house called churn comes into play once again.

The typical lottery player might buy just one, or maybe a few, tickets per lottery draw, and they’re done. However, a slot player would play several spins (tens if not hundreds) on each slot machine, and perhaps move between machines – for a total of several hundred to maybe thousands of spins per visit to the casino. Smaller margin per spin, but a few orders of magnitude more spins per visit makes the slot games just as effective as the lottery ones.

In numbers then – consider a player with a $100 bankroll playing slot machines with “only” a 7% house edge:

[table id=slots /]

So we see it takes just over 9 cycles for half his bankroll to be wiped out. What does this mean practically ? Well, 9 cycles totals about $685 in churned bets. So if you assume $5 per spin, that’s around 137 spins of the slot machine. Take an average of 4 seconds per spin, and that’s 9 cycles (and half his bankroll) gone in under 10 minutes!

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