How Casinos Work

Podcast Transcript

Casinos are fascinating places. They can make tons of money, but they don’t really have a product. While it is often called entertainment, unlike other forms of entertainment, no one is entertaining you.

In fact, the entire business is really nothing more than applied mathematics. With the proper application of mathematics and a liberal dose of high-tech security and proper management, a casino can become a cash machine.

Learn more about how casinos work on this episode of Everything Everywhere Daily.

I have a confession to make. I enjoy visiting casinos.

However, I also have another confession to make: I almost never gamble.

When I tell people I don’t gamble they often think it is for religious reasons or maybe because I have a gambling addiction. However, neither of those is the case. The reality is much simpler.

I have a degree in mathematics.

I know, mathematically, that the odds are against me anytime I put a bet down at a casino. I might win, but I probably won’t, and the more I bet, the greater the odds of losing.

So, that being said, I do enjoy casinos. What I find fascinating about them is how efficiently they are designed to use psychology and mathematics to extract the maximum amount of money from their customers.

In that spirit, I want to go over just exactly how casinos work. How they manage to make money and how manipulate people to give up their money.

I’ll note right up front that every casino is different. A mega casino in Macau will be different than a casino for locals in Las Vegans which will yet again be different from a casino on an American Indian reservation.

Nonetheless, they have enough in common that a general discussion can be had.

Let’s start out with the core of any casino, the games.

What if I gave you the opportunity to play a hypothetical game where the rules are as follows. We’ll flip a coin. If the coin comes up heads, I’ll give you a dollar. If it comes up tails, you give me $1.05.

Would you play that game?

Most people wouldn’t because it is obviously unfair, but you boil it down to its essence, pretty much every casino is the same thing. Every game in a casino has an advantage, oftentimes just a small advantage, which goes to the house.

Let’s take the game which makes the most money for most casinos: slot machines. Modern slot machines are nothing more than custom-built computers. All of them have what is called a built-in payout percentage.

This is defined as the percentage of money which is returned to the player. In Las Vegas, slot machines at various casinos will have a payout percentage from about 98% to 89%.

This isn’t a winning percentage, but it reflects on average, how much the house will return on each spin of the wheels.

In most casinos, slots make up the majority of their revenue. The games are popular and simple. While there are a few things you can do to increase your payout, it usually just involves betting the max number of coins.

Slot machines will usually have bright colors and lights, and they will make a loud noise when you win. The reason why the machine will make a lot of noise is that the house wants you to think that people around you are always winning. It can psychologically players think the odds are better than they are.

Table games are the only popular games in a casino. There are only a handful of games that are regularly played: blackjack, craps, baccarat, and roulette.

How the house gets its edge in each game is slightly different. In roulette, there are 36 numbers, but the payout for anyone number is only 35 to 1. Likewise, tables will either have one, two, and occasionally three zeros on the wheel. The zero space is neither red nor black, so if you make a color bet, the odds are less than 50%.

In blackjack, the house odds come from the fact that the player plays first. The deal has a pre-determined algorithm for what they must do for the cards they are dealt. If you follow the same algorithm, if you go over 21 and the dealer goes over 21, the house will collect your bet before the dealer busts.

Unlike other casino games, each hand of blackjack isn’t independent of the other. There are a finite number of cards, and once a card comes up, it can’t be played again until the deck is reshuffled. This fact is what makes blackjack potentially winnable if you count cards to determine what is left in the deck. You just adjust your bets to make them higher when the odds are in your favor.

However, casinos counter this by playing multiple decks of cards at the same time, and by just banning people who are making large swings in their bets.

Bacarrat is a very popular game in Asia. The game is very simple. There is a player and a banker and can bet on either one to win or to tie. If you bet on the player and they win, you double your bet, if you bet on the banker to win it pays 95%, and a tie pays 8 to 1, on odds of 9 to 1.

Craps is a much more complicated game, and the house edge basically involves the difference between the payout odds and the odds of winning. The house percentage in craps is usually listed as 1.41%.

With the exception of slot machines, most games will usually not have any more than a 5% edge to the house.

Why don’t casinos make the odds even more in their favor? Because they want people to keep playing. So long as the odds are in their favor, the longer someone plays, the greater the likelihood that they will not come out ahead, or just lose everything.

If the odds were any worse, people would just stop playing.

This desire to get people to keep playing and to play as much as possible is what is behind the psychological manipulation at a casino.

One thing you will not find in a casino is clocks. They don’t want people to know the time so they will keep playing. Likewise, there are no windows so you don’t know the time of day.

Almost every casino has really garish carpeting. This too is by design as studies have found that it keeps people alert and playing.

Trying to walk through a casino can be confusing and that is by design. If the casino has a hotel, you have to walk through the casino floor to get to your room. If you want to go to a restaurant or the bathroom, you’ll also have to walk through the floor.

You also might have noticed that you never play with real money in a casino. Modern slot machines will often play with credits on a card. Table games use casino chips.

There are several reasons for using chips instead of cash. First, it psychologically makes people think they aren’t playing with real money, so they tend to gamble more. Second, it is easier for surveillance to detect differences in chips than in pieces of paper. Finally, many people forget to cash in chips or take them home, and that is pure profit for the casinos.

Casinos also are on the cutting edge of data analysis. That is why almost every casino has a loyalty program.

This allows casinos to track the amount of money that their customers bet. Their customers who bet the most they will extend what is called comps. Comps are just complimentary things such as free hotel rooms, meals, drinks, and sometimes free casino chips.

The reason why they will extend these comps is to get people to come to the casino more often and to gamble more frequently. If you are a big enough high roller, known as a whale, these perks can be quite large. This can include flying in clients on private jets.

There is one story of a person who worked at the front desk of a hotel on the Vegas strip. Several celebrities came in looking for a room and the hotel was full. The only room available was their most expensive suite. The person at the desk said they could have the room for $5,000 a night, which they agreed.

The person at the front desk felt proud of themselves for selling the suite, but they were later reprimanded. A whale came into town, and there was no place at the hotel for them to stay. They would bet $5,000 a hand at the blackjack table, so the money made by selling the room was nothing in comparison.

Another classic story shows the power of keeping people in the casino. Australian billionaire Kerry Packard was a notorious gambler. In September 2001 he was in Las Vegas and was up several million dollars and was about to go home. When the terrorist attacks shut down all the flights in the country, he was stuck in Las Vegas for several more days, where he gambled more and wound up with a $6 million dollar loss.

Given the amount of money in a casino and the fact that every game has such slim margins, there is an ever-present concern for theft and cheating.

One of the first things you will notice in any casino is the ever-present eye in the sky on the casino floor. If you are at a casino, look up the moment you walk in and you’ll see small black domes on the ceiling. All of these are hiding cameras.

The cameras can detect player cheating, but they can also keep an eye on the casino workers. Everyone has someone watching them. The dealers are watched by supervisors who overlook the tables who are overseen by a pit boss, who in turn is observed by the cameras.

One of the most important tasks is the handling of money. You can exchange cash for chips at a cashier window or at a table. Once your money is exchanged for chips at a table, it is put into a locked box where it can’t be accessed by the dealer.

If you want to get cash for your chips, it has to be done at the cashier window, where all transactions are done in clear view of the cameras.

All of the cash is processed and counted in a special secure room called the count room. Count rooms may be divided into soft count rooms for paper bills and hard count rooms for coins.

The count room, like everywhere else in a casino, is monitored by cameras and often microphones as well. There they will count and bundle the money which is brought in where it will await transportation by armored car for deposit in a bank.

I find casino management to be a really fascinating subject. The amount of attention that goes into the smallest things is astounding, and it is all for the purpose of separating you and your money.

Despite all the detail and attention that goes into running a casino, it is at its heart a simple business. You create games where the house has a statistical advantage, and then get people to play as often and as long as possible to improve your odds of winning.

It is both why I find casinos fascinating, and why I never gamble.