Gamblers Who Beat the House

Podcast Transcript

You have probably heard the expression, “The house always wins.”

This is usually true….in fact, it’s almost always true.

If it weren’t true, then casinos wouldn’t exist. Every game in a casino is designed to give the house an edge so that in the long run, with enough players, they are mathematically guaranteed to win money.

However, there have been a few occasions where people have figured out a way to use the rules in their favor to win big.

Learn more about the gamblers who beat the house on this episode of Everything Everywhere Daily.

Let me start out this episode by noting that this is not about people who cheat. There are many ways to beat the house if you are willing to cheat. You could mark cards, you could play with loaded dice, you could set up a magnet under a roulette wheel, or you could just get a dealer to work with you to guarantee you win.

Of course, if you take this route, you might wind up in jail or in the basement of the casino with a guy named Vinny, who has a monkey wrench.

This episode is about the people who won and didn’t cheat. They found ways around the rules or loopholes in the roles, which allowed them to beat the house and make a tremendous amount of money.

We might as well start with one of the men who developed the most famous system of getting an edge over the house, Edward Thorp, the father of card counting in blackjack.

Contrary to popular belief, card counting is not cheating. Casinos have a vested interest in wanting you to think that its cheating, but its not.

Card counting is nothing more than paying attention to which cards have been dealt, which cards are remaining in the deck, and betting accordingly.

Thorp received his PhD in Mathematics in 1958 from UCLA and then worked at MIT from 1959 to 1961. While he was there, he began conducting research into blackjack.

He used an early IMB 705 computer to run simulations, which were based on a 1956 paper published by John Larry Kelly Jr., a researcher at Bell Labs. His paper proposed a method of sizing a sequence of bets.

Thorp realized that by betting at the correct times, it was possible to eliminate the house advantage in blackjack.

Here, I should briefly explain blackjack for those who aren’t familiar and why the house has an advantage.

The goal in blackjack is for players to achieve a hand value closer to 21 than the dealer without exceeding 21. Each player is dealt two cards and can choose to “hit” (take additional cards) or “stand” (keep their current hand). Number cards are worth their face value, face cards (kings, queens, and jacks) are worth 10, and aces can be worth either 1 or 11.

Players can also “double down” (double their bet and receive one more card) or “split” pairs into separate hands. The dealer follows set rules, usually hitting until reaching at least 17. If the player’s hand exceeds 21, they “bust” and lose the round. Blackjack, or a natural 21, occurs when the first two cards dealt are an ace and a 10-value card, which typically wins the round and pays out at higher odds.

You could if you wanted to follow the same algorithm that the dealer has to follow, but there is a problem. If both you and the dealer bust, the house wins because you bust before the dealer.

That is basically where the house gets its edge.

Thorp realized that the odds of beating the dealer were highly dependent on what cards had been dealt from the deck and which cards were left. When the deck was heavy in face cards and aces, the odds of winning shifted to the player. If the deck was full of lower-numbered cards, it was advantageous to the dealer.

With the mathematics of his theory established, Thorp needed to test his ideas. He found a professional gambler named Manny Kimmel to underwrite his experiment in casinos in Reno and Lake Tahoe.

Starting with an initial bankroll of $10,000, the pair managed to make $11,000 in profit over the course of two days.

Word spread quickly amongst the Nevada gambling community that a mathematician had figured out how to beat the casino.

Thorp eventually went directly to the public with his method in his landmark 1962 book “Beat the Dealer.” The book sold over 700,000 copies and made the New York Times Bestseller list.

Thorp’s discovery didn’t end with him.

With the publication of his book, the cat was out of the bag. Casinos figured out ways to limit the power of card counting by using multiple decks of cards. If you use multiple decks and reshuffle well before the decks are exhausted, then knowing what cards are left is difficult to do.

This made it harder to count cards, but it was not impossible. The fact that it wasn’t technically cheating didn’t matter to the casinos. It was possible to tell if someone was card counting based on their betting profile and if they think you are card counting, they can always ask you to leave.

One group from MIT took card counting to another level. Rather than having one person counting cards and making suspect bets, the MIT group worked in teams.

Multiple people would play at different tables, counting cards. They would look and act totally normal, never varying their bets. When the card shoe became advantageous to the player, they would singal one of their teammates who played the role of the whale. They would sit down at the table and begin making big bets.

After the shoe was exhausted, they would get up and move on, possibly letting someone else do the big betting.

This was much more difficult for the casinos to catch because there wasn’t one person who was betting erratically.

For almost 20 years, the MIT card counting team ran a professional operation with investors who earned a return on their investment. From 1980 to 2000, the team made millions of dollars.

However, card counting isn’t the only way to beat the game of blackjack.

A business executive named Don Johnson made $15 million from casinos in Atlantic City over a six-month period in 2010 and 2011 by playing blackjack without card counting.

How did it do it?

His system isn’t something that you or I could probably do. He took advantage of casinos’ willingness to bend over backward to attract players who bet large amounts, known as whales.

After the financial crisis of 2008, many casinos in Atlantic City were desperate for business and the easiest way to bring in money was attract a small number of whales.

Usually, they would give perks to whales, including free flights on private jets, free accommodations, and dining. However, if you bet enough, they might also be willing to refund some of your losses. The house might lose a bit of its margin by doing that, but they make up for it with the large bets.

Johnson wasn’t interested in the normal perks given to whales. He privately negotiated a series of rule changes to the game that he could play under if he agreed to bet a large amount on each hand. These rule changes included:

The dealer had to stand on 17. He had the option of Late Surrender, which means he could forfeit his hand and lose only half his bet after the dealer checks for blackjack. He could double down on any of the first two cards, and he could double down after splitting, with re-splitting aces allowed. The house could only use six decks, and they would refund him any losses over $500,000.

All of those rules individually were not unusual. They could be found at other casinos.

Johnson realized that all of these concessions, taken together, gave him a 0.26% advantage over the house.

He first negotiated these terms with the Tropicana in Atlantic City, and because the casinos were so competitive with each other, he got the same terms from the Borgata and Caesar.

He ended up winning $6 million from the Tropicana, $5 million from the Borgata, and another $4 million from Caesars.

Because he was often playing $100,000 per hand, the dealers made several errors in his favor because they were unaccustomed to dealing to such high-stakes games.

Another high-profile case of someone taking advantage of the casino is Phil Ivey. Phil Ivey is one of the greatest professional poker players in the world.

However, this example isn’t about poker. In August 2012, he was in London with a woman playing baccarat at Crockfords Casino. Baccarat, if you are unfamiliar with it, is a very simple game in which you bet on whether you or the dealer will get cards closer to nine.

Over two nights, he won £7,300,000 or about US$9,000,000. At the end of the first night, after playing in a private room, they were up £2,000,000. When they retired for the evening, they made a very unusual request.

They asked the casino to keep the same deck of cards when they came back the next day. The casino agreed, which was very unusual. Normally, casinos destroy every deck the day after they are used.

Phil claimed that he was superstitious, and the casino wanted to honor the requests of such a high-profile and high-spending client.

The next day, he and his friend got the same deck, and now they began asking for cards to be turned around 180 degrees before being put back into the shoe.

By the end of the night, Phil was up £7,300,000. However, the casino thought something was off, so they refused to pay him his winnings beyond the £1,000,000 he initially staked.

It turned out that there was an error in the cards that the casino was using. In the printing of the cards, some ink bled onto one side of the cards, which gave them a hit as to what the card was.

Phil sued the casino for his winnings, and the casino said he was cheating.
Crockfords won the lawsuit, but Phil Ivey wasn’t cheating by any strict definition of the word.

He didn’t fix the deck. The cards were provided by the casino. He just took advantage of their error.

I’m going to end with perhaps the biggest win of them all, and this one didn’t take place in a casino. It took place at a horse track.

Betting on horse racing is a type of Parimutuel betting.

Parimutuel betting is where all the bets are put in a pool, and the odds payouts are determined by the bets. The house, in this case, the race track, simply takes a fee from whatever is bet. The betters are, in effect, betting against each other.

While the house isn’t playing against you, the odds of winning in the long run at the horse track are pretty slim.

However, one man cracked the code. His name was Bill Benter.

Benter was a mathematician and an avid card counter. He read Edward Thorp’s book at a young age and was eventually banned from every casino in Las Vegas in 1984.

He then met a professional gambler named Alan Woods, who had experience in horse racing. With Woods’ horse racing experience and Benter’s computer programming background, the two moved to Hong Kong and began developing a computer model for predicting horse racing.

The model wasn’t just about who would win. Like Thorp’s original investigation into blackjack, much of it involved what to bet on and how much.

They used the Hong Kong Jockey Club as their base because the track there provided so much data about the races that it was much easier to create the model.

After several years of modifying their model, they implemented it in 1988. That year, they made $300,000, and in 1989, they made $3 million.

Benter and his team kept strict secrecy about what they were doing for years. Their approach was highly disciplined, betting as the model told them to do.

They kept up the betting for years. Their biggest payday took place in 2001 when they hit the Triple Trio, which is picking the top three horses, in any order, in three different races. They won the equivalent of $15 million US dollars.

Edward Thorp, the man who started this episode, wrote in 2017 that Benter’s organization may have made as much as $100 million dollars in some years and has made over a billion dollars since he first began betting based on his model in the 1980s.

What all of these example show is that while it is possible to beat the house, it is not easy to do. It usually requires a very mathematical approach and the right opportunity to exploit it. Even then, unless it is a parimutual betting system, you probably wont be able to get away with it for very long.