Gambling and business – liberal style
By Daniel M. Ryan
web posted December 4, 2006
An old saw, of the un-entrepreneurial classes, claims that business is like gambling: both are bad for you, and both make you lose in the end. Like the old superstition about bad luck awaiting the person who walks underneath a ladder, it does serve a protective function, even if the unintended spillover of the equation of business with gambling does make gambling seductive when entrepreneurship is respectable and is also called for.
Any economist can explain why business is not like gambling, relatively easily. Gambling games are always zero-sum; when the games are all over, money has changed hands, but nothing of any transferable value has been created. The only value in gambling, for the average gambler, is in the thrill of the game itself. Thus, gambling is a consumer's good, and the gaming industry is like any other kind of entertainment industry. A consumer is not an entrepreneur; the consumer is the ultimate recipient of entrepreneurial effort. To the extent that a consumer acts entrepreneurially, he or she does so through shopping around. Thus, an "entrepreneurial gambler" is one who seeks out the casino where the house's take is lowest, and/or one who seeks out a game where the odds are most in his or her favor. When seen in this perspective, the card-counter or the system player is like the consumer who sees an edge in, say, buying computer components and putting together a working computer from them. The "edge" in this case is a lower overall price for the resultant computer system. This can be categorized as a kind of entrepreneurship, but it is clearly entrepreneurial consuming. Profit, in the regular sense of the word, is not the goal; cost saving is. In this sense, a supposedly entrepreneurial gambler is someone who seeks to minimize the cost of the gaming experience, which puts he or she in the category of a consumer with initiative.
Yes, it's true that there are such things as "professional gamblers," ones who are put up with by the gaming houses, or in quite a few cases encouraged by them. These kinds of people are rare, and are easily classified in the same category as the person who's given, say, a free BMW on condition that he or she flashes it around. (More broadly, professional gamblers, not to mention lucky jackpot winners, are comparable to celebrity endorsers.) A free Beemer makes for quite a net income.
Some may not be convinced; they may insist that a gambler is an entrepreneur, and that every act of entrepreneurship is a gamble. The fellow who walks into the casino with a stake looks an awful lot like a fellow with a grubstake, and his priorities – his intentions – are an awful lot like the money-seeking businessperson. So, for the rest of this piece, I will assume that appearances and intentions are not deceiving, and grant that there is something to the comparison between the gambler and the entrepreneur - with this ponder point added:
What about the (as of now, online) gambler who gets a free subsidy-stake to start off with, or whose own contributed stake is augmented by a limited "matching grant" by the friendly casino? What kind of entrepreneur is this lucky fellow like?
The kind of businessperson that is every Liberal's pride and joy. The State-supported entrepreneur.
I myself had a chance recently to experience what life is like for the "assisted gambler," thanks to a mailed promo from Captain Cook's Casino. With the casino CD came an hour of free play, with $500 of free chips, as well as with certain conditions attached. These conditions made the experience similar to government-assisted business, instead of a welfare payday.
The conditions were: the $500 had to be deployed in the casino over the course of one hour's worth of casino operation, and there's no way for me to freeze the clock. In the course of that hour, I have to place a minimum of 100 bets. This minimum gets adjusted upwards, depending upon the kind of game I play. Two examples: for slots, every bet I make counts as one bet; for blackjack, every bet counts as 0.2 bets. By agreeing to play the hour-long freebie game, I put at risk the chance of claiming the $50 welcome bonus – but this risk comes with a nice guarantee: if I walk away from the free session a loser, or (as I found out) an insufficient winner, I get to claim the welcome bonus anyway. This supposed peril is merely a way of euchring out "double dipping," and nothing more. Quite a guarantee, this is, and it's even sweetened by the casino offering the player the option of shutting down the free play early and claiming whatever bonus is mandated by the pot's size, provided that the 100-bet criterion has already been met.
Of course, with floors usually come ceilings, and there is a ceiling attached to the offer I'm describing. No matter how lucky or successful I become in that hour, I can only claim $200 of winnings as a welcome bonus. So, anything above $700 in the pot is essentially brag money; it can mean nothing financially.
This calculus sounds a lot like the not atypical government-business dealie: go into business with the State, get your costs recouped if the business goes bust, but at the opportunity cost of a 100% surtax on "super-monopoly profits." Now, why would anyone object to a deal in which the only real cost comes for the "supremely lucky?" Especially if it's structured as a "welcome bonus" for the newbie entrepreneur? If you accept the business-gambling analogy, the dealie I got from Captain Cook's casino is like the hypothetical assistance program I've just described, provided that the payouts are limited to micro-enterprise levels. It's also a fun set of constraints for an economics major to sink his or her teeth into. (Entertainment, after all, is subjective.) Consider the set of incentives and disincentives I faced:
- No matter how lousily I play, or how unlucky I am, I still get the $50 bonus. This entails no loss, except for opportunity loss and possible consumer's enjoyment loss, for me going bust. So, there's less incentive for me to be prudent than there would be had I had to pony up the $500 myself.
- My lucky bounty has a ceiling, though: $200.
- I need to play 100 games, or else I can't claim anything, except for the nice $50 welcome bonus.
- I need to make those 100 bets within an hour, and the clock don't stop. I do, on the other hand, have the option of shutting down early, and can claim whatever bonus I rate at that time, provided that I have made those 100 bets.
Since I have dial-up, and since the clock runs while both the casino itself and any game I want to play are downloaded, the hour allocated to me did get run down during downloading time. I got less than 47 minutes of playing time, for one downloaded game. Had I switched to (download) another game, approximately seven or eight minutes would have been shaved off the clock during the additional downloading wait. So, given this additional constraint, the most rational choice for me was a slots game: there's no more than ten seconds between bet and outcome, and each bet counts as a full one for the fulfillment of the 100-bet criterion. In addition, the more bets I make, the greater chance, overall, that I will hit a very low-odds jackpot, the kind of lucky payoff that would net me the entire $200 bonus.
Rationally, therefore, my best strategy is to concentrate upon one specific game, a slots game, which I did. Once prepped, I should divide the amount of time I have left by the time it takes for a single play of the game, to get the number of plays I can make in the allotted timeframe. Once gotten, I should bet an amount equal to $500 divided by the number of plays I can squeeze into that allotted time. All it takes is one lucky jackpot to put me into the winner's circle, relative to the standard $50 bonus I would get anyway. This implies that I should put myself in the hands of Fate by picking one line per game, and going for the largest amount of the bet mandated by the earlier calculation of bet amount. Betting multiple lines – placing multiple bets on a single outcome of a game – and shaving the bet amount per line to match this splitting, by intuition, is a way to make my winnings closer to the average take, which is 100% minus the house's cut. (Recall, though, that a multi-line bet is many bets on a single outcome, much like drawing several cards from a deck instead of drawing one and reshuffling is.) Since there is no need for me to be "prudent" in that way, why should I?
Old habits do die hard, mind you. Those who know of the late Milton Friedman's pool-player analogy wouldn't be too surprised by the revelation that it took me 20-or-so minutes to make this intuitive calculation: bet a dollar on the single line, as quickly as possible, until the clock runs out.
As the hour continued, I did, briefly, get above $550 in the pot, but only slightly above. For most of the game – unsurprisingly – I was below $500. For a short stretch of time, early in the gaming session, I was below $250.
But, as I indicated, why should I care? If I have enough time for 500 single-line slot bets at $1 a crack, the difference between the pot going to $250 and the pot going to $0 means nothing – nada. The same conclusion applies to a pot of any size below $550.01. A real Chicagoite would consider me to be too prudent, for refraining to factor in any expected winnings. This criticism would be decisive had it not been for the (debatable) one-line reasoning above and the fact that $1 was the biggest bet I could make.
If the analogy between gambling and business is accepted, then the above calculus can be transferred, whole cloth except for specific details, into a micro-grant government program model. If I have $500, or $5000 or $50,000, of government money to start a micro-business, with no obligation to kick in any of my own money but the obligation to roll the first $50, $500 or $5000 (respectively) in profit into a "welcome matching grant" for another business-assistance program, then I may as well go for the lucky, if high-risk, score - the kind of business which gives me the greatest odds of getting a gross payback of $700, $7000, or $70,000, respectively. It could be considered irrational for me to shoot for a "welcome bonus payout" greater than 40% of the original stake, but there is a long-term compensation for me if I do so, in the verifiable claim that I not only was no "freeloader," but indeed was a more-put-upon-than-thou taxpayer, thanks to the 100% surtax! The welfare gains resulting from this brag are, of course, quite a challenge to quantify, but they are potentially there.
And, of course, to continue the analogy, I not only would have no potential losses, except for possible losses of time and reputation, but would qualify for the regular governmental "welcome bonus" anyway, no matter how I do. Shrewd economizing on my part can even minimize the reputation and time losses should such a business go down the toilet…
Unfortunately for me, though, I have to claim that I'm not a superb economizer at all. At the end of my frantic play, the pot stood at $507.01. The $50 welcome bonus was all that I rated. In addition, the allocated $500 was "replaced" by $507 plus a penny. Yes, I have to admit that I was sap enough to feel good about "returning" $500 plus a little to the "treasury."
No, as it turns out, I am not exactly an expert gambler. It's up to you to decide whether or not I'd make a good State-supported businessperson, or for that matter, any kind of businessperson at all, on the basis of my record as a freebie gamer, and the extent that such experience is relevant to gauging business skills. 
Daniel M. Ryan is a regular columnist for LewRockwell.com, and has an undamaged mail address here.