House Edges

I grew up in the Reno-Tahoe axis.  Given my early exposure to the fantastic local funding capabilities from gaming (i.e. jobs for parents, no Nevada income tax, tourists pay for city services), I soon realized only the house wins in the long run.  Luckily gambling, like cigarettes, remained off my preferred plate of vices.

Recently, debate in Congress over the legalization of online poker has been heating up. The clamor is a direct result of April 15, 2011, dubbed "Black Friday" in the poker community. On this date, the FBI shut down the three largest online poker sites, seized their assets, and charged the founders with felonies.

Poker is the most popular form of Internet gambling by far, so the reverberations throughout its community have been the largest. It is also the only form of gambling that can legitimately be considered more a game of skill than of chance, a key difference being emphasized by advocates of legalization.

The odds in any form of gambling can be boiled down to the house edge, or the advantage the house has over the player. For example: the house edge in Blackjack, when played with proper strategy, is 0.8%. So for every $100 you "invest" in the game, you'd expect $99.20 back. Poker differs in that it's played against other competitors rather than the house, so the house edge is in the form of a "rake," or cut of the pot, which is typically around 5%.

Obviously, this is a raw deal for the patrons. With the exception of poker players, all gamblers are guaranteed to lose over the long run. Even poker is a zero-sum game, with the vast majority of the crowd losing money. Given these facts, it's conceivable that Congress just wants to prevent us from squandering our wealth.

Of course, the government itself offers gambling in the form of lotteries. If our benevolent Big Brother really wants to protect us from the usurious advantages of online casinos, its own gambling systems should at least offer better odds. Do they?

Not exactly. In fact, it's tough to overstate just how horrible state lottery odds really are. Your odds are 7,500% better playing craps than buying the average state lottery ticket.

We can draw many conclusions from this data, but two stand out the most. First of all, the free market provides overwhelmingly superior and cheaper gambling entertainment than does the government. Second, the government's professed intention of saving us from ourselves is clearly a guise. In reality, it could be perceived that they attempt to eliminate or assimilate competition.

The full article by Dan Steinhart from Casey Research is linked here.