{"id":6,"date":"2005-03-14T07:40:12","date_gmt":"2005-03-14T11:40:12","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/rlucastemp\/2005\/03\/14\/oregon-lottery-video-poker-hold-ev"},"modified":"2005-03-14T07:40:12","modified_gmt":"2005-03-14T11:40:12","slug":"oregon-lottery-video-poker-hold-ev-statistics","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/2005\/03\/14\/oregon-lottery-video-poker-hold-ev-statistics\/","title":{"rendered":"Oregon Lottery Video Poker Hold \/ EV statistics"},"content":{"rendered":"

<\/a><\/p>\n

This posting has three parts:
\n
\nI. Why video lottery is a bad thing for the state to run
\n<\/span>    in which I describe philosophical and practical problems with the status quo.
\nII. What the state doesn’t tell about the mechanics of video lottery
\n<\/span>    in which I describe the key statistical
\nmetrics of how deleterious the game itself is, which metrics are not
\npublished by the state.
\nIII. My proposed scheme for remedying the situation.
\n<\/span>    in which I indulge myself with presumed legislative fiat.<\/p>\n

It will in turn be followed (preceded, for those of you reading in LIFO
\norder on the main page) by specific information hinted at in section II.<\/p>\n

I. Why video lottery is a bad thing for the state to run.
\n<\/span>
\nVideo poker (video lottery) as run in Oregon is deplorable for a number of reasons:<\/p>\n

1. It uses a state-enforced monopoly to dole out “free money” to the private sector at the whim of the lottery administrators.
\n    A. No innovations, goods, or services are required
\nof lottery “retailers” — the machine is in effect an artificially
\nscarce rent-producing box.
\n    B. Unlike in a public-private collaboration such as
\na utility, where the public (through the state) gives rights-of-way and
\nmonopoly in exchange for the pulic good of universal power and
\ncommunications accessibility, the private portion of the video poker
\ncartel (bars) brings nothing to the table except access to drunk people
\nwith cash.
\n    C. Giving free rents to qualifying and willing bars
\nin this manner dramatically disorts the economics of bar ownership,
\nsubsidizing poor management of properties (it is not unusual that a bar should “break even”
\non honest revenues, and make the annual profit from video lottery) and
\npenalizing bars whose morals or decorum make video lottery unacceptable.<\/p>\n

2. It figuratively “addicts” the state budget to its revenues, giving itself institutional inertia.
\n    A. Video lottery sales comprise the lion’s share of
\nlottery sales ($530 M \/ $895 M in FY 04), making the video lottery the
\nsine qua non of the entire operation.  (The portion of sales from
\nvideo lottery will rise dramatically as “line games” — slot machines
\n— are added.)
\n    B. The net transfers to the state in excess of $364
\nM  make for 3% of the state’s budget.  This does not include
\nan effective “slush” fund of carry-forward earnings.  Legislators
\nmust account for this gap if they take anti-lottery measures,
\neffectively hobbling forward-thinking lawmakers.  Job and
\nentitlement cuts that would follow budget cuts due to lottery rollback
\ngive the lottery allies in the powerful public-employee unions.
\n    C. The lottery uses its earnings, before paying the
\nstate its dividend, to pay for aggressive public-relations campaigns to
\nensure its institutional lifespan.  If Republicans are afraid of
\nhaving to “starve” state-perpetuated “beasts,” this one is
\ntruly fearsome.<\/p>\n

3. It literally addicts gamblers, and constitutes a massive regressive wealth-transfer system.
\n    A. The video lottery is faster and more addictive
\nthan paper lottery tickets; in fact, Oregon video lottery now
\nofficially includes “line games,” or slot machines.  For more on
\nthe addictiveness of the video lottery in South Carolina, see
\nhttp:\/\/slate.msn.com\/id\/36673\/
\n    B. By reducing the need for a higher or more
\nprogressive income tax, the video lottery subsidizes the highest-income
\nOregonians.  (Not that we need to be paying particularly higher
\nincome taxes, mind you, but there you have it.)<\/p>\n

4. WORST OF ALL: Video lottery is the least transparently-treated part of the whole lottery scheme.
\n    A. The lottery commission emphasizes the paper
\nticket games on its web site and its PR campaigns.  In fact, the
\n“ticket” lottery sales (excluding keno, multistate, and sports) amount
\nto less than 22% of sales — the vast majority comes from video lottery.
\n    B. The lottery publishes frequency charts and odds
\nof winning for the various ticket games, but publishes little about the
\nvideo lottery machines.
\n    C. Nowhere are the rules, EV \/ hold, and frequency audits of the video poker machines published.  <\/p>\n

On the flip side, however, there are lots of things to like about the video lottery:<\/p>\n

1. It gives money to the state budget.
[2. Some folks like to play it for fun.]<\/p>\n

How can any principled person like the video lottery?  Religious
\nfolks should hate it because it’s gambling.  Liberals should hate it because it’s regressive in
\nits redistribution and because some people have fun with it. 
\nConservatives should hate it because it “feeds the beast” and teaches
\nfiscal irresponsibility, and because some people have fun with it. 
\nLibertarians should hate it because it’s a state-violence-enforced
\nmonopoly in what should be a competitive market and therefore people
\naren’t free to have fun with it on their own terms.  Humanists
\nshould hate it for its fostering of antisocial behavior and its
\nreduction of human potential to negative-sum lever-pressing
\ndomapinergic repetition.<\/p>\n

II. What the state doesn’t tell about the mechanics of video lottery.
\n<\/span>
\nWhat do I mean when I talk about “hold” or “EV?”  These are
\nmeasurements of the “edge” in a game (hold being the house edge), or,
\nfrom the player’s perspective, the Expectation Value, given as portion
\nof amount wagered to be received back on each trial on average (note
\nthat EV is typically stated less the initial unit bet, e.g. starting at
\n0, giving a positive or negative figure, -.05 instead of .95.  I
\nprefer EV given with 1.00 instead of 0 as a starting place, for ease in
\nthe types of calculations I prefer.  If you are using the normal
\nmethod, simply subtract 1 from the EV numbers I use).<\/p>\n

A quick primer on EV: for every $1 you bet, how much will you make
\nback, on average?  With a perfect coin-toss, it’s $1 in, $1 out —
\n50\/50 odds, or a 1.00 EV.  If the coin were biased to heads by 1%,
\nthen your $1 bet on tails would win $0 [or “lose”] 50.5% of the time,
\nand win $2 only 49.5% of the time, giving you a 0.99 EV.  EV under
\n1 is considered “negative,” while the rare chance for a positive EV bet
\nis one in which the EV is greater than 1, also known as “getting the
\nbest of it.”  Representative EVs include: roulette (American)
\n.947, blackjack ~.98, craps (pass line) .985, coin toss, 1.00, a year
\nin a savings account, ~1.01, a year
\nin the US equity markets, ~ 1.07.  Remember, EV is calculated with
\neach and every bet, like compound interest, so a .99 EV game done for
\n100 trials should net you back only 0.37 of your money (though in
\nreality variance messes up that neat figure).  Contrast that
\nwith 100 years in the stock market at 7% [1.07 EV], which should give
\nyou 867 times your money back, less taxes.  The total amount bet *
\nthe number of bets is “action;” if you bet $5 100 times, you put $500
\nin action through, even though you may only have ever had $25 to play
\nwith.  The “hold” is1-EV, or the percentage of each bet that the
\nhouse gets back; because it’s calculated on each trial, the house
\nexpects to earn the “hold” times the “action.”  Got it?<\/p>\n

Poker players, stat jockeys, and others with a sense of EV will appreciate this chart from the Oregon Lottery’s
\nannual report FY 2004:
<\/b><\/p>\n


\nSales:<\/b> The Lottery had the highest sales
\nyears ever in each of the following categories:
\n Total Lottery Sales:                   <\/span>$895.18 million<\/span>
\n
\nVideo Lottery Sales:                 <\/span>$530.97 million<\/span>
\n
\nTotal Traditional Sales:  <\/span>            $362.30 million<\/span>
\n Keno Sales:      <\/span>                       
\n<\/span>$116.48 million<\/span>
\n
\n <\/span>Powerball Sales:                      
\n<\/span>$  <\/span>45.97
\nmillion<\/span>
\n
\n <\/span>Sports Action Sales:     <\/span>            <\/span>$  <\/span>10.00 million<\/span>\n<\/p><\/blockquote>\n

At the bottom is Sports Action — a game that is technically beatable
\n(positive EV) if you are an expert handicapper.  Then comes
\nPowerball, a game that is rarely, but occasionally, positive EV because
\nit is progressive (if nobody wins, the jackpot can theoretically get
\nlarge enough to give a positive return).  Then comes Keno and
\n“traditional” — the stuff that most people think of when “lottery” is
\nsaid — all negative EV games but transparently so.  But almost
\nall the money, in reality, comes from video lottery — video poker (and
\nsoon slots) — about which almost no information can be found.<\/p>\n

Note that video poker can be positive EV — in a competitive market
\nlike Las Vegas, where 1. operators have an incentive to reduce the hold
\n(increase the EV) and 2. progressive jackpots exist that, when unwon,
\ncan boost the EV to positive.<\/p>\n

Why, gentle reader, am I spouting off about the corrupt lottery system?<\/p>\n

The answer is that I recently visited a local watering-hole with some
\nfriends, and lined in the cramped ante-bar area were some video lottery
\nmachines (no boon to those of us smooshed together, waiting in line to
\nget a drink).  My friend A. pointed to the screen of the nearest
\none, which read<\/p>\n

[Machine Configuration]      [Game Configuration]
[Reports]              
\n             [etc]<\/p>\n

…instead of the usual blinky-beepy come-ons.  Curious, we
\npressed the reports button, and found the machine happy to give us
\nprintouts of the game holds, results, revenues, etc.  For your
\nedification, I will be posting this information shortly.  However,
\nin sum, please be aware of the following:<\/p>\n

– The EV on most all Oregon video lottery games is 0.90, or put another
\nway, the “hold” is 10%.  This is a truly outrageous rate that
\nmakes casino roulette (~5.3%) blackjack (~1-2%) and craps (~1.5%) look
\nlike great deals.<\/p>\n

– The EV on “flush fever” is 0.94, or the hold is 6%.  This is
\nvery bad, but a hell of a lot better than others (like “jacks or
\nbetter”).<\/p>\n

– The “double up” game, offered after each win, is even-money (EV 1.00).<\/p>\n

(Keep in mind that all games played against a “house” with
\nnear-infinite resources subject the player to “gambler’s ruin,” a
\nsituation in which the player underperfoms his EV because short-term
\nvariances wipe out his bankroll.  This boost the effective hold
\nover the theoretical hold, in most cases.)<\/p>\n

Why is this significant?  After all, everyone knows that the
\nlottery is a sucker bet, right?  Well, perhaps, but there are
\nsucker bets, and then there are sucker bets.  You are wiped out
\nexponentially faster with such a huge edge as 10%.  Consider a
\nbrisk but realistic pace of 360 video poker hands per hour — the least
\nthat may be wagered is 25 cents.  The total action per hour is $90
\n— at 1% hold, the player loses less than a buck.  But with Oregon
\nvideo lottery, the least he will expect to lose is $9 per hour — more
\nthan the state’s minimum wage.  Consider, too, that the average
\nbet is larger, and that the swings of the game put him at risk of
\ngambler’s ruin.<\/p>\n

The difference between a sucker bet, and a sucker bet, is huge.  <\/p>\n

III. My proposed scheme for remedying the situation.
\n<\/span>
\nHere is what should be done:<\/p>\n

[As a general premise: 0. “Indian” casinos should be replaced with a
\nbrand-new way to take land and manpower and make jobs; I call these
\nspecial programs Indian “factories.”  The Indian factories can
\nmake “goods” that are exported at a “profit.”  This will give them
\njobs and tribal tax revenues.]<\/p>\n

[UPDATE: The Wall Street Journal recently covered a development where
\nit appears others share the above premise — there is now a trend for
\nIndian tribes to use reservation land to build legitimate industry,
\nlike concrete plants.]<\/p>\n

1. The state gives up video lottery.
\n2. To combat grey market video lottery, to prevent folks driving out of
\nstate to play other states’ terminals, and to ensure proper income
\nreporting for taxation, the state forms a video lottery audit board.
\n3. The audit board licenses establishments to have a certain number of
\nmachines present, and licenses machine owners to run any number of
\nprivately-owned machines with publicly-audited software.  Each
\nmachine’s hold percentage may be set and changed by its owner.
\n4. Each machine must be conspicuously labelled with its hold percentage \/ EV (see II. above) and most recent audit.
\n5. The audit board charges fees sufficient to fill its budget. 
\nOverage is rebated to license-holders, preventing the state from having
\nan interest in promoting video lottery.
\n6. Machine-owner licensees contract at arm’s length, at-will, with
\nestablishment-licensees as to machine placement.  This creates a
\nhealthy, adversarial competition for the customer’s dollar between the
\nbooze and the slot machine.
\n7. The state makes its money off of income taxes.<\/p>\n

The ends my plan serves are:
\n1. Elimination of state dependence upon, promotion of, or interest in, people losing more money at the video lottery.
\n2. Reduction in the “hold” and profitability of video machines by market forces, thereby:
\n3. Reducing incentives for “Indian” casinos by taking pricing power away from them on video poker-type games.
\n4. Reducing incentives for poorly managed bars by lowering the amount of the received subsidy from the video lottery.
\n5. Maximizing  happiness by promoting more play per unit wager for
\nlovers of video lottery and eliminating video lottery from some bars
\nfor whom the lowered margins do not justify keeping the games.<\/p>\n","protected":false},"excerpt":{"rendered":"

This posting has three parts: I. Why video lottery is a bad thing for the state to run     in which I describe philosophical and practical problems with the status quo. II. What the state doesn’t tell about the mechanics of video lottery     in which I describe the key statistical metrics of how deleterious […]<\/p>\n","protected":false},"author":1180,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-6","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/posts\/6","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/users\/1180"}],"replies":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/comments?post=6"}],"version-history":[{"count":0,"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/posts\/6\/revisions"}],"wp:attachment":[{"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/media?parent=6"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/categories?post=6"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/rlucastemp\/wp-json\/wp\/v2\/tags?post=6"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}