One of the greatest challenges facing casino executives is dealing with volatility (significant fluctuations) in table games win. While there is little variance in expenses, table games win can be extremely volatile. Today, casino executives must answer to boards of directors or Indian tribal councils with little gaming experience. Consequently, it is paramount that the executive understands volatility and knows the risks. Further, the executive must have adequate knowledge to answer to his or her supervisors for any fluctuations in win. Unfortunately, gaming wins and losses are often as much of a surprise to the executives as they are to the player. Most often, these extreme fluctuations are the result of allowing certain players special betting limits over and above the posted maximum bet.
In table games at many upscale casinos around the world, management frequently affords certain players “personal” betting limits. For example, the casino might have a posted blackjack limit of $10,000, but Player N can bet $100,000. It is common for a casino to have a list of players with special limits: Mr. X at $25,000, Mr. Y at $50,000, and Mr. Z at $75,000. Probably the most common practice is to allow the player a maximum bet equal to 5 percent of his or her credit limit. Therefore, a $1 million credit line player can make a single bet of $50,000 while a $500,000 credit line player can only bet $25,000, and so on. Why this practice? Most often you will hear “because we always have.” Unfortunately, though common, this practice defies logic and only exacerbates extreme fluctuation in win.
The root of the problem lies in management’s focus on “beating” the player. If a player loses $1 million, management would say “we beat him out of a million.” This sounds permanent, right? However, this premise is false, misleading and dangerous. A magician gets the audience to buy into his trick by using misdirection, and casino management acts just like the audience by looking in the wrong direction.
Assume a player’s theoretical loss is $100,000, but the player actually loses $1 million. Management is only fooling itself if it believes the $900,000 is theirs to keep. The casino is only holding this amount in escrow for other “winning” players. The only sure-fire way to keep this money is to get out of the casino business once the player leaves. Management must accept this axiom: The casino does not keep what losing players lose. Rather, the casino keeps the difference between what losing players lost and winning players won.
How does this misconception lead to special limits? Well, management will look at a particular player’s credit limit—for this example, let’s assume $1 million. Management will then permit a special limit of $50,000 in the belief that the casino can beat the player out of as much as $1 million.
However, management should really be concerned with how much they can “earn” from the player rather than how much they can “beat” from the player. A well-run casino should operate more like an insurance company than a gambling house. For an insurance company to be successful, it must obey the rule of large numbers, meaning that a whole bunch of people must bet each year that their homes will be destroyed or cars will crash. Some policyholders will win their bet and receive a payout, but the majority will lose their bet because their home or car was not destroyed. When a casino allows just a few players to make unusually large bets, the casino is gambling. Gambling is for players, not the casino. So how does a casino mitigate its exposure? If the executive understands volatility, he or she can style an agreement with a risk level acceptable to the casino.
For example, assume a blackjack player comes to the casino and wants to deposit $1 million in the cage but wants a $50,000 maximum bet. Should the executive accept this play? If not, can the agreement be styled in such a way so that the casino’s risk exposure is acceptable? If the executive understands volatility, the executive can calculate the casino’s win/loss probability for “x” hands played at “y” average bet. Further, the executive may feel that the casino does not want a probability of loss greater than 40 percent. If the executive analyzes the proposition and makes a few assumptions, the executive can counter the player’s offer with one acceptable to the casino.
Since the casino knows the player will bet as much as $50,000 in a single wager, the executive needs to assume or require a specific minimum bet. In our scenario, a $10,000 minimum bet requirement would not be unreasonable. The executive must also consider volatility. The most conservative approach would be to assume half the wagers at $10,000 and half the wagers at $50,000. The executive must also consider the player’s skill level. In our scenario, assume a 1 percent player disadvantage. In analyzing this proposition, the executive will discover that the casino has a 40 percent probability of loss if 1,200 rounds are played. A player, playing head-up, can complete more than 1,200 hands/decisions in six hours.
Armed with this information, the executive could style the agreement as follows:
• Require a minimum bet of $10,000 and allow a maximum bet of $50,000 per hand.
• If the player chooses to play more than one hand per round, the total wagered cannot exceed $50,000.
• If the player is losing, the player can exit the game and the agreement at any time.
• As long as the player maintains a net win, the player must play a minimum of 1,200 hands.
Even under these terms, the casino still has a 40 percent probability of losing. But it is able to control the risk.
Most casinos today are publicly owned, and Wall Street frowns upon casino companies that fail to meet their projections. Wall Street usually gives publicly owned casinos 90 days to balance their actual and theoretical win. The casino needs thousands of hands at every bet size before it can be reasonably assured actual and theoretical are in balance.
Casino management has two options to minimize volatility: 1) avoid special betting limits entirely; or 2) style special agreements with players in such a way that the risk level is acceptable. Choosing something in the middle is the equivalent of gambling by the casino, which stockholders do not favor and which gives those stockholders an allergic reaction when the casino loses.
Author’s Note: The “Casino Marketing Manager” software was used to calculate probabilities. It can be found at JimKilby.com.
Jim Kilby, formerly the Boyd Professor of Gaming at UNLV, has over 35 years of experience in the gaming industry and serves as consultant to casinos across the globe. He is the co-author of Wiley’s Casino Operations Management, a top selling gaming industry reference book. He also developed “Casino Marketing Manager,” a popular software program. Visit JimKilby.com
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