The gaming market is big business from the U.S., contributing an estimated US$240 billion to the economy annually, while generating $38 billion in tax revenues and encouraging 17 million jobs. What people might not realize is that slot machines, video poker machines and other electronic gaming devices make up the vast majority of all that economic action. At casinos in Iowa and South Dakota, by way of example, such devices have contributed around 89 percent of annual gambling revenue. What about slot machines makes them reliable money makers? In part, it’s something to do with casinos’ ability to hide their true price from even the savviest of gamblers.
The Notion of a slot
An important fiscal theory holds that when the price of something goes up, demand for it will fall. But that depends on price transparency, which exists for almost all the daily purchases we make. That is, other than visits to the doctor’s office and the automobile mechanic, we understand the purchase price of most goods and services before we decide to cover them. Slots could be even worse than the doctor’s office, in the majority of us will never know the actual price of our wagers. Which means the law of supply breaks down.
Casino operators usually consider cost in terms of what’s called the typical or expected house advantage on every wager placed by players. Essentially, it’s the long-term edge that is built into the game. For an individual participant, their limited interaction with the game will end at a “price” that appears much different.
For instance, consider a game with a 10 percent home edge – which is fairly typical. This implies that over the long run, the game will return 10 percent of all wagers it takes to the casino that owns it. So if it requires $1 million in wagers over 2 million twists, it would be expected to cover $900,000, causing a casino profit of $100,000. Thus from the management’s perspective, that the”cost” it costs is the 10 percent it expects to collect from gamblers with time.
Individual players, though, will probably specify cost as the price of the spin. As an example, if a player bets $1, spins the reels and receives no payout, then that’ll be the cost — not 10 cents.
So who’s correct? Both, in a way. While the game has certainly collected $1 from the participant, management knows that 90 cents of that will be dispensed to other players.
A participant could never know that, nevertheless, given he will just be playing for an hour or two, during which he can expect a massive payout will make up for his many losses and then some. And at this speed of drama it may take years of playing with a single slot machine for the casino’s long-term benefit to become evident.
Short / long-term
This difference in cost standpoint is rooted in the gap between the short term perspective of the players and the long-term perspective of direction. This is one of the lessons I’ve learned in my over three decades in the gambling sector analyzing the operation of casino games and as a researcher studying them.
Let us consider George, who only got his paycheck and heads into the casino with $80 to spend more than an hour on a Tuesday night. There are essentially three results: He loses everything strikes a considerable jackpot and wins big, or loses or leaves a little but manages to walk away before the odds turn against him.
Needless to say, the principal outcome is much more widespread than the other two — it must be for the casino to maintain its house advantage. The funds to cover important jackpots come from regular losers (who get wiped out). Without these winners, there may be no winners — that is why so many individuals play in the first location.
Specifically, the amount of each the individual losses is used to finance the massive jackpots. Thus, to provide enticing jackpots, many players must eliminate their Tuesday night bankroll.
What is less obvious to many is the long-term encounter rarely happens at the player level. To put it differently, players seldom lose their 80 in a uniform manner (that is, a rate of 10 percent per spin). If this were the normal slot experience, it would be disappointing. However, it would make it quite easy for a player to recognize the price he’s paying.
Increasing the cost
Ultimately, the casino is selling thrills, which is comprised of trust and variance. Though a slot may have a small house advantage from management’s perspective, such as 4%, it can and often does win all of George’s Tuesday night bankroll in short order.
This is primarily due to the variance in the slot machine’s pay table — that lists all the winning symbol combinations and the number of credits awarded for every one. While the pay table is visible to the player, the probability of producing each winning symbol combination remains hidden. Of course, those probabilities are a vital determinant of the home advantage — that is, the long-term cost of the bet.
This rare ability to conceal the price of a good or service provides an opportunity for casino management to increase the price without notifying the players — if they could get away with it.
Casino managers are under tremendous pressure to maximize their all-important slot earnings, but they don’t want to kill the golden goose by increasing the”cost” too much. If players have the ability to detect these hidden price increases by simply playing the games, then they may opt to play at another casino. This terrifies casino operators, since it is difficult and expensive to recover from perceptions of a pricey slot merchandise.
The best way to get with it
Consequently, many operators resist raising the home advantages of the slot machines, presuming that players can detect these price shocks.
Our new study, however, has found that increases in the casino advantage have generated significant gains in revenue with no indications of detection even by savvy players. In multiple comparisons of two otherwise identical reel games, the games that are pricey produced significantly increased earnings for the casino. These findings were confirmed in another study.
Further analysis revealed no symptoms of drama migration from the high-priced games, whatever the fact their low-priced counterparts were located a mere 3 feet away.
Significantly, these results occurred despite the egregious financial disincentive to play the high-priced games. That is, the visible pay tables were identical on both the large — and low-priced games, within each of the two-game pairings. The only difference was the concealed probabilities of each payout.
Equipped with this understanding, management may be more inclined to increase prices. And for price-sensitive gamblers, reel slot machines may become something to stop.