The House Wins
By Melvin J. Howard
Imagine you are stepping into a Casino in Vegas and imagine what you will see. In one section you will walk past the slot machines and nearby will likely be the Keno Room with the comfy chairs and table for all your free drinks. In a separate section there will be the games that are more complex and harder to play such as BlackJack, Craps and the like. Secured away upstairs or in some guarded area are the rooms for the high rollers. Think of the socio-economic classes you are likely to find in each area - in general, lower income people will be at the slot machines and in the Keno room and the highest income people will be in the High Rollers Room. In the middle are those at the regular Black-Jack and Craps tables.
Now ask yourself, given this distribution of class by game, which group has the worst odds? Which group is likely to lose the most of what they wager? The Answer: The Keno Players and Slot Machine Players. And not just by a small amount, by a very large amount as evidenced by statistics reflected in what is known as the House Edge. I am sure you might be surprised by the differentials if you haven't seen them before.
The House Edge is defined as the average amount that a player will lose as a percentage of their initial bet in any game. This average is always positive by necessity, so that the House can a make a profit and thereby stay in business, or, in other words, avoid collapsing. The House Edge or Margin on an average bet is positive, and the rest of the money wagered is simply redistributed amongst the casino players and that is what gambling is all about. Those players that lose are simply passing on their funds to those that win. That the House Edge is positive simply means that, on the whole, the losers lose more than the winners win, and the House takes the difference for its efforts in arranging the distribution of wagers. Without the House to provide this function there would be no such gambling on such a large scale.
I got some information on House Edges from the web site of a professional gaming analyst. I recommend you look at some of these sites if you are interested in the most probable amount of money you will lose if you hang out at the casino too long. Here's the house edge data: Keno has the worst odds with a House Edge of a whopping 25%-30%! This means the following - Let's suppose you go to the Casino one night with a 1,000 of your closest friends (for statistical significance), and you all play Keno all night at a place where the House Edge is 25%. As a group you will walk out of the Casino with 25% less than what you came in with. Some of your friends will lose everything, while others may double or triple their money, but on the whole the group has lost a quarter of what it started with. You and your 1,000 friends have simply redistributed money between yourselves and paid the house a whopping premium for the privilege of doing it on their premises.
Slot machines are next. You will lose, on average, between 5% and 15% of what you put into a slot machine, depending on the Casino and the type of machine. Craps is next, where you will lose, on average, between 1% and 15% depending on how you play the game. Your best bet is Black-Jack, as long as you know how to play, with a House Edge of less than 0.5%, i.e. One half of one percent. The very best bets, or best odds, will often be found in the High-Rollers room where the House knows it has a smaller edge on a much larger base. In a spooky kind of way, the social and economic relations of the casino world mimic the relations between humans and the financial markets in the broader world.
Consider the House in the broader world to be the financial markets themselves, backed up by the banks and central banks who create the most basic forms of money. Consider that for any attempt to generate returns a piece of your effort is going off to the financial markets, or the House, in order to keep it going. Consider that the wealthier you are to begin with, the higher are your chances of winning more money, and that the more money you have the better the House treats you and the better the terms of credit, should you wish to borrow from the House. Consider that the poorer you are the more expensive it is to play, and the chances of positive returns are much lower.
But the real world situation gets worse. Now consider that the dealers are incentive to win for the House/Bank/ by participating with the gambles themselves. If the dealers want to borrow from the House/Bank to play, that’s OK. They will get good terms of credit. If they lose too much they get fired and you only keep the dealers that keep winning. To attract the very best dealers you decide not to regulate them and so you don't keep track of what their betting positions are, or even how much they borrowed from the House. Why they are smart people - the best - some of them even came up with computer programs to predict the unpredictable.
But then one day the smartest, most winningest dealer of all, a private equity or hedge fund a investment bank loses a huge gamble, most of the wager having been borrowed from the House guess what. There's no way he can repay this loan to the House and the House looks like it could go bankrupt. But the House can't fail! In order to avoid the Casino/Financial System collapsing the Law of the Land/The FED says that all casino players PLUS all those that have never been to the Casino/The Tax Payer in their lives must be charged a certain amount to avoid the collapse of the casino. Now that’s a sure bet!
