Entertainment and Media: Markets and Economics Professor William Greene
Entertainment and Media: Markets and Economics Casino Gambling
Casino Gambling • The Market • Gross Revenue 2012: $37b – Churn: about $700b • State/Local taxes: $8.6b • Employment: 330,000+ • Competition: • Caesars+MGM 30% • Top 5, (incl. Harrahs, etc.) 40% • Local monopoly – national market shares are meaningless • The Product • A Production Function? • Casino Profitability • Why Do People Gamble?
Casino Production Function • Output: Two or more • Gambling profits • Entertainment experience (Las Vegas) • Food and drink • Inputs • Fixed: Most of the cost structure • Variable: Labor, drink, foodstuffs, supplies, small. • Economies of Scale? Certainly • Economies of Scope? Unclear • Technological Advance? Definitely
A Casino Production FunctionSubstitution of Inputs Technological Advances: Bill changers at slot machine stations Automatic Card Shufflers at Poker and Blackjack Tables All electronic, video card games
The Essential Element of Casino Profitability House advantageGames are not “fair” Expected winning is always negative, even when payout is proportional to true odds. The “product” of this result is predictable via the Law of Large Numbers.
Casino Profitability – Certainty The essential result: The Law of large numbers. Event consists of two random outcomes YES and NO Prob[YES occurs] = Prob[NO occurs ] = 1- Example: Throw a die. True Prob(Face = 6) = 1/6. Event is to be staged N times, independently N1 = number of times YES occurs, P = N1/N LLN: As N Prob[(P - ) > ] 0 no matter how small is. The law states that if you run the experiment enough times, the proportion of “successes” in the runs of the experiment will eventually match the actual probability of success.
Interpreting the LLN For any N, P will deviate from because of randomness. As N gets larger, the difference will disappear P Computer Simulation of a Roulette Wheel Number of Spins
Casinos Use the LLN • Payout at any game setting in any repetition is unpredictable • Average payout over the long term, many thousands of repetitions is almost perfectly predictable.
American Roulette • Bet $1 on a number (not 0 or 00) • If it comes up, win $35. If not, lose the $1 • E[Win] = (-$1)(37/38) + (+$35)(1/38) = -5.3 cents. • Different combinations (all red, all odd, etc.) all return -$.053 per $1 bet. • Stay long enough and the wheel will always take it all. (It will grind you down.) • (A twist. Why not bet $1,000,000. Why do casinos have “table limits?”) 18 Red numbers18 Black numbers2 Green numbers (0,00)
Pay Less than True Odds Caribbean Stud, 5 Card Poker • You must get the hand • Dealer must get Ace/King or better • You must have a better hand than the dealer
The House Edge is 5.22% These are the returns to the player. It’s not that bad. It’s closer to 2.5% based on a simple betting strategy. http://wizardofodds.com/caribbeanstud
Gambler’s Ruin • By dint of the LLN, a small, long term bettor eventually goes broke • Assume house edge is 5% • On an initial $1000, gambler leaves with $950. • On returning to the table with the $950, the gambler leaves with $902.50 • After only two rounds, the house has gained 7.50% • And so on… • A better strategy is to make one huge bet. • The casino imposes table limits on all games.
The Gambler’s Ruin http://en.wikipedia.org/wiki/Roulette
Since Hamman founded the Dallas-based company in 1986, SCA has grown into the world's go-to insurer of stunts that give fans the opportunity to win piles of dough if they make a hole-in-one, kick a field goal or sink a half-court shot. SCA determines the odds for each contest and charges event sponsors a fee based on the probability of someone succeeding, prize value and number of contestants. If the contestants win, SCA pays them the full prize amount. If they don't, SCA pockets the premium. "The primary distinction between us and [traditional] insurance businesses is that they restore something economically when something bad happens," Hamman says. "When you put on a promotion, you're simply taking a position on the likelihood of an event occurring."
Information Asymmetry? • Do gamblers know the true odds at any game? Blissful ignorance Bettors usually do not know the true odds. Bets are always based on subjective probabilities which are usually too high in their favor. (Example, blackjack behavior) • Does the house know more than the gambler?The house relies on the law of large numbers and the house advantage. That is all they need to know. • Does it matter? Why does the gambler gamble?
The Business of Gambling • Casinos run millions of “experiments” every day. • Payoffs and probabilities are unknown (except on slot machines and roulette wheels) because players bet “strategically” and there are many types of games to choose from. • The aggregation of the millions of bets of all these types is almost perfectly predictable. The expected payoff to an entire casino is known with virtual certainty. • The uncertainty in the casino business relates to how many people come to the site.
Thriving Not Thriving Are there differences that explain why thoroughbred racing as an industry is thriving and greyhound racing is declining?
Why Do People Gamble? At low levels of exposure, consumers enjoy risk. They enjoy unfair games. The fun of winning offsets the negative value of the game. Utility 9 8 7 6 5 4 3 2 1 0 The same consumer insures their car and home. Casino Wealth
Entertainment and Media: Markets and Economics End Class 5 – Part 3