Introduction to Gambling

You should be having fun with your Quatloosia! And few things are more fun than going to a big casino. Especially if you are in a place like Vegas, you've got the shows, you've got the glitz, you've got the great restaurants . . . and, yes, you've got casinos -- lots of them.
This webpage isn't meant to bash casino gambling. What it is meant to do is make sure that you understand casino gambling, and most importantly the significance of "Odds", so that when you gamble you will lose the least possible amount of money. If you don't understand the Odds, you will lose all of your Quatloos in short order, so you might as well send them to us as we won't lose them so quickly. If you do understand the Odds, you should be able to visit a casino and have the best chances of winning.
So why is gambling on a scams and frauds website? Because simply the odds of some casino games are so bad that they amount to scams, and any many ways the casino "system" is a fraud on unwitting bettors. This is not to say that somebody has their finger on the wheel or the decks are stacked, but rather that the casinos have designed things so that you are misled into wanting things that you really don't if you think about it.
But even more importantly, through the study of gambling many basic risk management concepts can be taught, and applied in practical, easy-to-see situations. Many of the world's best derivatives traders are also ardent gamblers (and usually card counters), who understand the odds and seek to develop systems which give them the best odds against the House -- the very same type of odds they seek against their competitors in the stock markets.
So, if you are interested in gambling, you'll enjoy this section not just for the hints, but for concepts of hedging and risk management which you can carry over to your business.
Understanding the "Odds" and the House Advantage
The "Odds" are your mathematical chances of beating the casino.
Let's take roulette, for instance. In the average U.S. casino, the roulette table has 38 pockets -- 1 through 36 on alternating red and black pocket, and a "0" pocket and a "00" pocket.
If you place your money on "red", meaning that you believe that the ball will land in a red pocket, then your odds are:
· 18 pockets are red -- if the ball lands in a red pocket you win;
· 18 pockets are black -- if the ball lands in a black pocket you lose; and
· 2 pockets (0 and 00) are green -- if the ball lands in a green pocket you lose.
Thus, your odds are 18 red that you will win versus 18 black + 2 green that you will lose, or 18 to 20. However, the "House" (casino) will only pay out at 1:1 if you win this bet. This means that the House has a 2-in-38 advantage (the 0 and 00 green pockets), or in percentage terms a House Advantage of 5.26%.
The Risk Cycle
The risk cycle is how many plays, spins, or rolls, etc., that you can make, before the House Advantage over you increases by one betting unit.
It is easier to illustrate this. Let's go back to our Roulette example. If the House Advantage is 5.26%, this means that the House can expect to gain a one-bet advantage over you every 19 rolls (1 divided by .0526 = 19). So, if you are betting $10 per spin, then after 19 spins the House can expect to be ahead of you by $10, after 38 spins by $20, after 57 spins by $30, and so forth and so on.
If you play Keno, the House Advantage is 25%, meaning that the Risk Cycle for Keno is 4 games.
If you play Blackjack with the Basic Strategy, and keep the House Advantage to 1%, the Risk Cycle is 100 hands (meaning that you can play a long time before the House gets an advantage over you -- but only if you play to minimize the House Advantage to 1% or less)..
The Single Most Important Thing You Will Ever Know About Casino Gambling: The Concept of Risk Compounding
Now for the very important stuff . . .
All of the books on gambling will analyze in excruciating detail the House Advantage, and go into various strategies designed to minimize the House Advantage. What none of the books we have read have ever discussed is what we will call "risk compounding".
"Risk Compounding" means that with every roll, your overall chances of beating the House go down, because the House's long-term advantage grows larger with every roll or play.
Let's go back to our Roulette example. On your first play the House advantage is 5.26% against you beating the House. These odds will not change, meaning that on any given spin your odds of beating the House is 5.26%. This is not the "payout" you can expect to walk out of the casino with over time, because the House's odds are risk compounded.
Now on each roll, your chances of winning that particular spin will always be 5.26% -- that will never change. But let's look at your odds of being "positive" versus the casino.
If the House's advantage over you is 5.26%, that means that your odds of winning is 44.74% per spin (50%-5.26%=44.74%). It also means that your expected "payout" should be 89.48% of the total amount you bet (2 x 44.74%), i.e., if you bet 1,000 in 100 spins of 10 each, you should expect a payout of $894.80 at the conclusion of all your spins.
We have already discussed that the Risk Cycle for Roulette is 19 spins, meaning that after 19 spins you can expect to be behind 1 bet. This is where Risk Compounding kicks in, because it determines the number of spins that you must beat the odds to be able to walk away from the table a winner -- or even just even.
Your chances of leaving the Roulette table a winner are determined by calculating your Payout Percentage to the power of the Number of Wins You Need to Get Ahead. Thus,
Behind 1 Bet 89.48% 89.48%
Behind 2 Bets 89.48% x 89.48% 80.07%
Behind 3 Bets 89.48%^3rd 51.33%
Behind 4 Bets 89.48%^4th 6.94%
Behind 5 Bets 89.48%^5th 0.00%
What this means is that on your first spin you have a 89.48% chance of walking away a winner. If you lose that spin, you have a 80.07% chance of walking away even, but after getting down 3 bets only a 51.33% chance of walking away a winner. If you are down four betting units, you have a small 6.94% chance of beating the House, and after you are down 5 bets you are toast (statistically you can't win).Since the House's 5.26% advantage means that it should win an "extra" over you ever 19 spins, this means that by at least the 95th spin (19 x 5), the House knows you will be a loser.The casinos know this math better than anyone, and the pit bosses can quickly calculate based on the amounts you are betting, and the time you will pay, almost exactly what your losses will be! As former casino executive Barney Vinson wrote in his fascinating expose, the casinos
"know that they have the advantage over long-term play. A few short-term wins never phase the casino bosses, because they know that the longer a player stays at the tables, the greater the likelihood that the player will lose."
"Exposure. That's what it is about. The few players who know how to 'hit and run' are not the casino's first choice. They like the players who grind it out. Their term for this type of player is 'casino-oriented.' But a more accurate term for them is 'loser.'
B. Vinson, Las Vegas: Behind the Tables, p. 126 (Gollehon Books, 1988).
There are several ways to calculate risk compounding, but the result is the same: The more you play, the lower your cumulative odds are of "beating" the House. In casino parlance, this is known as "letting the odds wear down a bettor".
Short Term Odds vs. Long Term Odds
Keep in mind too that our discussion is of long term odds. In the short term anything can happen, i.e., you could be down 4 bets in Roulette (mathematically a sure thing loser), but put your money on red and have red come up five times in a row (you're now a winner!). But this just further bolsters our rule that you are better off making a couple of bets in most games, and hoping that Lady Luck is with you on those bets, because over the long haul you will get trounced.
Let's say you did put your money on red in Roulette, but it came up black 5 times in a row? That wasn't supposed to happen -- you were supposed to win a little less than half the time weren't you, meaning that you have at least one two spins . . .
The odds have a much different application to you than to the House. You may sit down and play 50 hands of Blackjack in a session, and within those 50 hands anything could happen. You could get a hot streak and win 10 straight hands, or you could get a cold streak and lose 10 straight hands, or you could just be generally hot or cold within those 50 hands.
Because you are playing only 50 hands, you will be subject to swings within those hands.The casino doesn't look at your 50 hands to calculate its odds of having enough money to pay for all the electricity and the landscaping it takes to run the place. Instead, the casino looks a all the hands IT is playing during a day, maybe 50,000 hands of Blackjack! Over the course of 50,000 hands, hot and cold streaks tend to even out, and the odds means the casino pretty much knows that for so many thousand hands played, it will walk away with so many dollars.
So, when you see discussions of odds, you must take this grain of salt: The odds are really only relevant to the casino unless you play a lot of hands, spins, or throws . . .
How the House Maximizes Its Advantage
The casinos all know and understand "risk compounding" and as has been mentioned know that they the "odds" can "wear a gambler down over time." This is why the whole casino system is set up not only to encourage you to bet, but to make a bunch of small bets so that you have no chance of beating the casino. What the casino doesn't like is a bettor who comes in and makes a couple of bets, wins, and then leaves.
Here's a couple of the ways the casinos take advantage of risk compounding:
Table Maximums: Casinos rake in millions of dollars per day and hundreds of millions and sometimes billions of dollars per year. So why do they have table "maximums" of $500? Simply, to discourage large bettors (known as "whales") from coming in and making a few big bets which could detract from the casino's bottom line, and then leaving without the casino being able to wear down the bettor. While casinos will set up "high limit" tables, these are usually restricted so that to get in these games you must first enter yourself in the "comp system" (described below) which like a bad community theatre play, everybody wants to get into but then they are miserable while they are there.
Table Minimums: These perform two functions: First, to drive away the "grinders" who would play with quarters if they could. Second, but more importantly, to psychologically encourage people to bet at or near the "minimums" making lots of smaller rolls which give the casino a much better chance of making money than if the gamble just made a couple of big rolls and left.
The Comp System
Very simply, the "Comp System" is set up to give gamblers who put up a minimum amount of money "at risk" for a certain period of time, certain "complimentary privileges" starting at the low end with free trips to the buffet to at the high end stays in hundred-thousand-dollar-per-night suites and LearJet shuttles to and from the casinos.
Most people who visit the casinos desperately want to get "comp'd" and enjoy the casino privileges free of charge. This is a boondoggle. As show, the longer you play the lower your odds. The casinos have long since calculated how long you need to gamble before there is no chance of you "beating" the House and you will suffer big losses. So what you are doing is essentially sacrificing your chance to beat the casino for a free buffet or a stay in a suite (so you can gamble so more later, further reducing your odds and the casinos payouts).
If you see a person who is in the casino just for the "Comp" system, you can go and offer to tattoo "sucker" on their forehead, because that's what they are. They would be well ahead to just pay for the damn buffet and luxury suite themselves out of their own pocket, and then take on the casino with one or two big rolls with much better odds. Playing for long periods of time with large amounts of money is mucho stupido because of the House Advantage, but that's exactly what the comp system is designed to get you to do.
Does this mean that you should stay out of the casino's Comp program? No. You should just look at Comps as a bandage that the casino gives you after you lose, and very small part of your overall return (OK, the buffet got you $15 bucks back), but NOT as a reason for gambling in the first place. People who gamble FOR Comps are stupid.
Quatloosia! Rule of Gambling
So what does all of this mean? We're talking about the whole design of the casino system to get you to the tables and keep you there as long as possible. It means, very simply:
· Your best chance of "beating" the House is on your first play;
· Your odds of "beating" the House go down with multiple plays; and
· With multiple plays, your odds of "beating" the House will eventually go to zero.
Leading to the Quatloos! Rule of Gambling: With almost all casino games, you have better overall odds making one big bet than making a bunch of smaller bets. But if you want to play for a long time, stick to the games which give limit the House advantage to around 1%.
Note that this is not saying that the odds change. If you bet $1,000 all at once the House only has a 5.26% advantage over you, and if you bet the $1,000 over 100 bets at $10 each, on each $10 bet the House advantage is still just 5.26% on each roll. The difference is that by betting the $1,000 on one roll, you actually have a chance of winning that roll and coming out ahead of the House. By betting 100 times at $10 each, the casino mathematically expects that you will be "down" by at least 5 bets (100 divided by 19 = 5), and being down 5 bets mathematically means that you have very low odds of eventually fighting back and beating the House.
Where does this rule not apply? You don't have to worry about this rule too much, or about risk compounding so long as you stick to games which -- if played correctly -- can bring the House advantage to within 1%, essentially a statistical "dead heat" with the House, meaning that the House can only expect its advantage to appear after 99 bets (a lot of playing time). But see above warning Short-Term Odds vs. Long-Term Odds.
So, if we can't avoid the temptation, lets just make a bet or two on the terrible games, and lets instead spend our time enjoying only the very best odds games where the House advantage is 1% or less.
Beating the Odds (Or At Least Keeping Them Within Reason)
What the casinos are dreadfully afraid of are systems that have the effect of giving the bettor an edge, no matter how slight. The reason for this is that risk compounding works both ways: If the bettor can get even a slight edge, then with multiple rolls the bettor has no chance of losing!
The best-known system for beating the odds is counting cards in Blackjack. A good card counter can turn the tables on the odds so that he has an approximately 1.5% advantage over the House. Over 100 hands, this means that the bettor has a risk compounded advantage of 6.5% over the house -- very significant, and terrifying enough to the casinos that they will eject and Blacklist any bettor whom they believe is card-counting.
But the truth is that humans are not perfect, and there is probably nobody and no system that an play without making an occasionally error. So really, what you end up doing is finding systems that will statistically allow you to play "even" against the House over a long period of time, with the goal being to have the most amount of fun while gambling with the least amount of loss.
Even Games (Sometimes Player Advantaged)
Games with which you can limit the House's statistical advantage to less than 1.0% -- if and only if you are a very educated and astute player -- include:
· Blackjack
· Craps
· Video Poker
The truth is that probably less than 1/2 of 1% of the players of these games play them well enough to come anywhere near this "statistical dead heat" with the House. Unfortunately, many people think they are good players without even knowing what it takes to play well enough to get these odds. For those 99.5% of people who cannot play these games with near perfection, the House advantages probably ranges from 2% to 5%. Novice and really dumb players (such as those who play the "Field" in craps, or accept insurance in Blackjack) can play with a House advantage probably approaching that of Keno (the worst game in the casino).
Small House Edge Games
Games with which you can limit the House's statistical advantage to at or slightly more than 1% include:
· Baccarat
· Pai Gow Poker
· High-Dollar Slot Machines
Only Pai Gow Poker requires skill, and you with this game you will only get near the 1% mark if you are an expert with near-perfect play. Despite its James Bond-ish glamour, Baccarat actually requires less skill than about anything except the slots, and of course the slot machines require absolutely no skill.
Sucker Games
Sucker games, meaning games that will give the House such a big advantage that you'd have to be a real sucker to play them, include:
· Roulette (no matter what goofy combination of pockets suckers come up with, mathematically they can never get the House advantage lower than 2.63% in Europe, or 5.26% in the U.S.).
· Caribbean Stud (worse than Roulette, since you can't get the House advantage lower than 5.3%).
· Casino War (with a 2.88% minimum House advantage, much better than Carribbean Stud but still awful).
· Keno (THE sucker game of all time, considering that the lowest House advantage is 25%! -- worse than cumulative odds of all the other casino games combined).
· Let-It-Ride (Worse than Caribbean stud with a 3.5% minimum House advantage).
· Slot Machines (The average House advantage is 7% which is somewhat offset by the fact that it make take awhile to lose all of your money, and if you play long enough you might get a free T-shirt or buffet which takes the edge off your losses).
· Wheel of Fortune (known as the "Big Six" because there are 6 horribly low-odds bets that suckers can -- and frequently do -- make).