In gambling, the casino, lottery operator, or bookie always takes a cut, and I don’t begrudge them that. They need income to run their operation. Fine.
Bookies make this reasonably clear, by declaring the spread. You can simply multiply the odds on both sides of a bet to see how much the average bettor will keep, and how much they will lose.
Lotteries are generally far less transparent. I have yet to encounter a lottery that listed its take on the ticket.
Casinos are the worst. With the exception of very simple “games” like roulette, their take is either obfuscated by a complex (but carefully tuned) set of rules, or simply unknowable, as with slot machines. (In Las Vegas, most slots take 5-10% on each round.) Moreover, their instant-win mechanics are designed to let their take grow to 100%, as they take their cut again every time you play another game with your remaining chips. This is what makes casino gambling so especially dangerous: it is constructed so that individual games appear nearly fair, but in the end they usually take all your money.
Regulations on the odds of individual games don’t really help, especially in the casino case. No matter how slim the take, the house will eventually soak up the gambler’s entire budget.
What would a fair gambling operation look like? I have a notion. I call it “Fair Games”.
For games of pure chance, a Fair Games casino would be required to have even odds. For example, a Fair Games roulette table would eliminate the “0″ and “00″ cells. (Mathematically, there is a possible bias due to exponential random walk effects, but in practice this should not be significant.)
For games that contain an element of skill, or games of chance whose odds cannot easily be adjusted, a Fair Games casino would be required to have even effective odds over long periods, i.e. the payouts must equal the bets. The exact manner of achieving this would be up to the establishment, verified by checking the books. One way to accomplish this would be by having a floating “winner bonus” of a few percent that the casino adjusts according to the observed payout rates.
To fund its operations, a Fair Games casino would charge an explicit participation fee. This could take the form of a percentage upon converting cash into chips, a day-pass charge, a per-game fee, or any other form, so long as it is decoupled from the odds within the games. This ensures that customers are clearly informed about how much money they can expect to lose. An academic would call it “informed consent”. A lawyer would call it a “meeting of minds”. I call it honesty.
A Fair Games casino would benefit from significantly improved customer appeal, especially from people who rightly distrust casinos in their current form. Unfortunately, that good will might well be insufficient to overcome the marketing power generated by incumbent casinos’ enormous margins. Regulation by the government would probably be required, and the political sway (or legally exempt status) of the current casinos may be too strong for this to happen.
However, there is one game that the government can control without regulation: the state lottery. In fact, applying a Fair Games approach to the lottery is very natural. As my foreign friends are fond of reminding me, Americans are uniquely accustomed to paying an explicit sales tax on top of the stated price of consumer goods.
As a first step toward Fair Games, we should require all our lottery systems to operate at pay-in/out break-even, and provide margin (to fund their own operations and their beneficiaries) in the form of an explicit lottery ticket sales tax. According to the State of Washington’s annual lottery report (page 42), the average lottery in the United States had a payout rate of 61%, equivalent to a 63% sales tax.
Put that number next to the price tag and if people want to play … at least they’ll know what they’re getting into.