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Executive Summary Casino gambling is an intriguing topic, because it attracts quite a large crowd despite the fact that the odds are stacked in its favor. There are many reasons why people continue to gamble at casinos even though their probabilities of winning remain quite low, while their expected returns are negative. In the long run, no one can defeat the casino, but one can hope for short-term gains. Another reason people gamble is for entertainment purposes; they see the losses as compensation for entertainment that casino gambling provides. Regardless, the fact is that casinos aim to make money, and short-term gains are not always guaranteed. Because of this fact, there exists an incentive to cheat the casino. Gamblers have many options open to them to cheat, and casinos have many loss control methods available to stop or deter cheating. The purpose of this paper is to analyze all methods of cheating available to gamblers and the incentives casinos have to deter such activities using a cost-benefit analysis. While our findings pertain to any casino, we will focus specifically on the largest owner of casinos, MGM Mirage. Gambling and Company Background The womb of unpredictability has created man’s appetite for gambling. The desire to increase the chances of winning by drawing patterns from chaos has lead to the advancement of statistics, mathematics, and of course, cheating. Cheating is the ability to conjure advantages unavailable to other opponents by abnormal physical manipulation or signaling. Deception, which is allowed in various games, differs from cheating in that it explores various strategies available to all participants. Unrestrained cheating can potentially can result in a huge financial loss as well as a reputation cost to the victim. Financial cost comes from the obvious monetary loss, reputation cost is perhaps more harmful in that if an organization is known for being 1 gullible it will attract more cheaters. For casinos this is especially troublesome for they can potentially lose the business of many honest patrons, who do not wish to be scammed. Since discussing cheating in casinos is a sensitive topic, and taboo to discuss with members outside the industry, even magnates like the MGM Mirage would not disclose expected cheating losses to us during a phone interview. MGM Mirage is one of the most prominent casinos in the Las Vegas Strip. The hotel-casino has a tropical jungle type atmosphere where patrons can be dazzled by a volcano that erupts every few minutes, a wide collection of wildlife, or hypnotized by Siegfried and Roy. The casino portion of the Mirage has a various gambling venues such as slot machines, traditional card games, and craps, to name a few. MGM bought Mirage in March 2000 for $6.4 billion. Currently, the resort has been doing quite well. Compared to 1999 year-end 2000, revenue increased by 20% to $157.8 million with substantial increases in room and entertainment revenues. MGM Mirage Corporation has stopped issuing individual financial data for each of its 18 properties, but as a conglomerate $1,913,733,000 of its $3,518,933,000 revenues came from casino operations for year-end 2000. The Mirage appeared in the Las Vegas desert in 1989 when the population was 800,000. At that time, Las Vegas had 55,000 hotel rooms and 15 million annual visitors. In 1999 the city had doubled its number of tourists and hotel rooms with 35 million and 110,000 of each, respectively. The growth of the industry has made it very important and costlier to mitigate losses due to unfair play. Key Risks (w/probability assessment) Casinos are set up using the laws of probability so that they make a profit in the long run. For example, in five-card stud poker the probability of winning nothing is .5012, which means the probability of winning something is .4988. When one loses, he loses a larger amount than he 2 can gain, because the probabilities are weighted. This is how the casino makes money. When placing a field bet in craps, the expected return for any dollar bet is a loss of 2.78 cents; another example of the casino’s expected positive payoff (See Appendix 1 for casino advantages). Faced with such impossible odds of winning, patrons of casinos have incentives to cheat at the casino in hopes of improving their given probability distributions to make a win more likely. Professional gamblers pose the most serious threat as most dealers have amassed years of experience to thwart amateurs. Methods of cheating range from the overused to some of the most innovative. Recently, collusion with dealers for cash back bonuses has come into style. Most dealers are required to fill out customer rating cards to provide an incentive to high stake gamblers to claim cash back bonuses. Some dealers collude with players to falsify such rating cards enabling the player to claim bonuses. Past posting is another method used commonly, especially at the craps table and roulette. The player moves his bets just after the dice has been thrown. This is achieved by grouping a large number of chips around the same numbers. Once the dice are thrown, the player deftly sweeps his arms across the table, as if he were in an act of exultation, moving the chips. The player depends on the presence of a large number of people at the table, so as to not draw attention to himself. Card counting is one of the more “traditional” methods used in the game of blackjack, brought to light by MIT professor Dr. Edward O. Thorpe in the early 1960's. First, let us dispel some of the myths about card counters. Card counters do not memorize every card they see in a deck. This would require a photographic memory and would not be pragmatic. Card counters simply use a system that keeps track of the type of cards played so they know when the deck 3 becomes favorable to them. The basis for card counting is derived from the following example: Imagine that there is a bowl full of 100 marbles, 50 being black and the rest red. If one were to reach into the bowl and pull out 10 red marbles, there would be 40 red marbles and 50 black marbles remaining. If one randomly selects a marble from the bowl, the odds are higher it will be a black marble. All a counter does is keep a running count of the cards played so he can determine the amount of 10-value cards left in the deck. The more 10-value cards left in a deck the better it is for the player. Collusion with dealers is the ace that most crooked players have in their sleeves. Dealers have razor sharp reflexes honed through years of experience, and depend primarily upon dexterous shuffling, stacking, cutting and dealing to move the odds in favor of the colluding player. Peeking, seeing a card in the deck while dealing without making any suspicious movements, is easiest to master and can be worth a fortune. Knowing the last card dealt to an opponent, especially in blackjack, offers a crushing advantage. To know the next card, the dealer simply grips the deck in his left hand as he normally would when dealing, with his index finger curled across the top edge, his three fingers wrapped around the bottom, and his thumb across the top card. Although he is required to deal cars individually, he draws two cards at once, raising both as he extracts the top one from the deck to grab a quick view. Cutting aces allows the dealer to locate aces while shuffling the deck of cards. Hands are the tools used by dealers, so if they are too dry, most rub some hand lotion into the palms and fingers to sensitize their touch. Incidentally, if a player smells hand lotion during a high-stakes card game, he has reason enough to be very cautious. Dealers start rifling the deck of cards, which refers to the act of holding the deck in one hand and then rapidly shuffling them. Keen eyesight allows them to locate the aces, and that is where they stop, to split the deck. Since the 4 dealer knows that the ace is at the bottom of one of the split piles, he can deal it to the player he chooses. Signaling is the most common technique used, both by colluding dealers and also between groups of players. The players avoid the high stake tables, as they are prone to strict monitoring. They also split up in groups that keep changing in composition to avoid being identified. The players have a predetermined code established to signal the cards they currently have in their hands, which is very useful during games like blackjack. The beauty of this technique is that individual players often lose money, deceiving the dealer into believing that he is doing well. The group as a whole always comes out in the money. Some enterprising gamblers, who are regulars at a particular casino, though relatively uncommon, are also using fake casino chips. The gambler familiarizes himself with the chips, and manages to take photographs so as to record the intricate details, and then gets them reproduced. Since the costs involved are high, the gambler only cheats the casino once, and attempts to recover most of his costs. He typically plays at the high-stakes table to establish his credibility as a high-stakes gambler, and prefers large casinos, where employees cannot track his movements as he attempts to cash in his chips. Electronic devices, often restricted to the realm of spy thrillers and science fiction, are now making their presence felt in casinos. Digital cameras have become miniaturized to the extent that they can be fitted in spectacle frames. Gamblers either carry these devices or plant them in a convenient location to view the dealer’s hand and that of other players. Often, an abettor watches the video feed from the device and then relays the relevant information to the player with the help of a tiny radio transmitter. 5 Motivations for Hedging The casino must hedge these losses from cheating because they have the potential to grow as the prevalence of cheating does. If a casino gains a reputation for being ignorant of cheating techniques, it can lead to significant losses. In order to stay in business, casinos must hedge their potential losses using a cost-benefit analysis for each form of loss control for each method of cheating. Loss Control and Financing There are several methods of loss control available to thwart each type of cheating. Hidden cameras are the most common. Typical cameras cost $200-$700, but “Eye in the sky” cameras—a one-way mirror surveillance in the casino area—can cost over $1000 (See Appendix A for table of costs). Mirrors or dark glass that circles casino ceilings conceals people who are assigned to watch the casino action to prevent cheating by players or dealers. These are also costly devices. There are also cameras behind the decorative looking glass. Cameras can detect cheating the same way players can detect other players who are cheating. It is an unnatural injection of distorted action that perceptively jolts the otherwise logically connected occurrences in games. So, if a player monitors and compares the actions of his opponents to the most logical actions according to the situation and odds, he will quickly detect the distorted playing and betting patterns that always arise from cheating. That awareness enables him to sense cheating without ever seeing a suspicious move. This method would work best for card counting, where there are no direct physical actions that take place. Another method is to hire observers at each table to supplement the work of the pit boss. This would help specifically at certain games, but not necessarily card-counting in blackjack. Though card counting is not illegal, it is a form of cheating because it gives the gambler an edge. 6 Casinos in Atlantic City, by law, cannot kick card-counters out. Instead, they impose tougher blackjack rules, multi-deck games and limit deck penetration to keep the skilled counter at bay. Though a casino does have the ability to remove those it sees counting for other reasons, the minuscule amounts lost to card counters are trivial compared to the money made from the uninformed masses of poor players and bad counters. Hiring a guard at each table on a salary of $17,000 per year is a costly monitoring activity given the limited number of successful card counters there are. Increasing deck size, thereby limiting mathematical ability of cheating is a much cheaper alternative. With the growth of technology and use of electronic devices, cheating using this method poses a new threat. While it may be difficult to observe players using small portable devices or digital cameras, it may be effective to install detectors near the casino entrances to ban their entry into casinos. A handheld device is $400, and a full machine can be more than $2,400. These devices would detect whether patrons are carrying electronic devices that would aid them in gambling. This would effectively eliminate the risk of patrons using these devices, whereas security cameras and guards would not be able to observe these activities as much, given the wide floor coverage they are already responsible for. Because of the advancement in technology, and the uncertainty of what future devices will be invented, it may be wise to invest in detectors so that all current and future electronic cheating risks are eliminated. The risk that poses the biggest threat is collusion, because it involves the cooperation of the dealers and/or other players. To get the dealers to be faithful to the casinos and not to the professional gamblers would require the casino to offer incentives that reward books with high performance. Therefore, if a dealer were colluding with a player, his book would hurt as a result, 7 and he would not receive a reward. Granted, he would share the prize of collusion, but he retains the risk of losing his job for bad performance or if he were caught. To guard against fake chips casinos make their own unique chips that are virtually impossible to replicate. There is not too much cost associated with this task, because chips are a cost that casinos incur to perform daily operations. The cameras and guards are able to monitor attempts by players to use fake chips, and the dealers are well aware of such activities, too. Due to the uniqueness of chips at each casino, catching a fake is fairly easy. Card counting is probably the most fool-proof way to cheat, because essentially one is not manipulating the gambling environment, but rather rearranging the odds in his favor. When a casino executive decides to bar a card counter, he maybe impinging on the casino’s gain form other avenues. Most expert card counters have approximately a 1 percent edge over the casino in real-life play. While in theory, statistics show us card counting can get a person a 1.5% edge in playing blackjack, the ledgers of expert players show us quite clearly that for various reasons the rarely realize more than 50 to 75% of this mathematical expectation. Even if the card counter does make his minimal percentage gains, the more players who join the game, the better is the casino’s chance of making money at the table. Also, there stems the probability of an auxiliary loss from the expulsion of the counter’s spouse, friends and relatives who could be bad gamblers and thereby add to the casino’s bottom line. The occasions when card counters can be threats to the casino are when everyone at every table is a well-financed card counter, an unlikely occurrence. That is when the casino will lose money to them in the long run. Or, if wellfinanced teams come into an establishment and their betting significantly skews the action of the casino, then this can have a negative impact. If the team’s betting is not perfectly synchronized 8 so as to skew the action of casino on a given night, the impact will be marginal at most and negligible at least. Card Counters – Cost-Benefit Analysis Should you place the cut card to cut off more of the decks? NO. With more players the “table-edge” reverts back to the casino. Shallow cuts mean fewer rounds, more shuffles and less money won per hour. NO. One fewer round because the counter spread to 2-3 hands is marginally good for the casino. Counter eats up counts shortening number of rounds for big stake players. NO. If you shuffle, the counter leaves, other players wait, and you’ve lost playing time. Players like routines. Should you tell the counter he cannot spread to two or three hands if he’s been playing one? Is preferential shuffling on the counter for the counter a good idea? Is preferential shuffling on the counter for the counter a good idea? NO. The more good options you guys offer, the more poorly bad players play. More than 90% of blackjack players in Las Vegas do not play basic strategy. Summary and Recommendations The Casino is essentially a profit making organization and it looks mainly to stem the losses arising from short term cheating. Having examined most risk mitigation techniques one can come to certain conclusions about which ones to implement. A good option is to offer card counters larger bets and more games since by doing that the casino can tempt him into erring in his judgment, while keeping in mind that in the long run his winning streak against the casino will not hold up because of the odds. Closed-circuit cameras are frequently used and seem to be the best form of physical deterrence, as a guard cannot survey as many tables at the same time. 9 If the person cheating is aware of the presence of cameras he will be cautious about his every move, whether it be card counting or signaling. Incentives to dealers to prevent collusion will also be effective. The casinos must first analyze their cheating losses, and then determine an amount equal or preferably less to devote to preventing cheating through incentives, cameras, or guards. Otherwise, it is better of retaining the risk if all these cost more. Because these costs, aside from the incentives are fixed, it may be beneficial to make use of them. Most importantly, one has to be careful also, when removing successful gamblers from casinos on the premise of cheating, because it can hurt business in the long run. Casinos tend to get paranoid about a successful player on any given night, little realizing that while the odds are small in their favor, they are still there. Often, when removing successful gamblers, one could be detracting from the casino’s overall revenues because equally avid gamblers who can only add to the positive expected returns usually accompany a whale of a gambler. The residual risks that remain after loss control measures have been taken are that of good players and odds of the players sometimes getting ahead of the casino. The impact of these risks is more often than not pretty minimal, since there are very few players who are able to adversely affect the casino’s house advantages. The motivations for retaining these risks are that the casino will always profit in the long run because the mathematical odds are highly in favor of the casino. When combined with the large number of games and players, the frequency of the casino winning remains extremely high. 10 Appendix 1 - Index of House Advantages Game Blackjack* Blackjack* Blackjack* Blackjack* Blackjack* Baccarat Baccarat Baccarat Big Six Big Six Big Six Big Six Big Six Big Six Caribbean Stud Poker Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Craps Bet Single Deck Double Deck Four Decks Six Decks Eight Decks Banker Player Tie (pays 8:1) $1 $2 $5 $10 $20 Joker/Logo Pass/Come Don't Pass/Don't Come Pass + 1X Odds Pass + 2X Odds Pass + 5X Odds Pass + 10X Odds Pass + 100X Odds Field (2:1 on 12) Field (3:1 on 12) Any Craps Big 6,8 Hard 4,10 Hard 6,8 Place (to Win) 6,8 Place (to Win) 5,9 Place (to Win) 4,10 Place (to Lose) 6,8 Place (to Lose) 5,9 Place (to Lose) 4,10 Proposition 2,12 Proposition 3,11 House Advantage 0.20% 0.35% 0.51% 0.60% 0.63% 1.17% 1.36% 14.12% 11.11% 16.67% 22.22% 18.52% 22.22% 24.07% 5.22% 1.41% 1.40% 0.85% 0.61% 0.32% 0.18% 0.02% 5.56% 2.78% 11.11% 9.09% 11.11% 9.09% 1.52% 4.00% 6.67% 1.82% 2.50% 3.03% 13.89% 11.11% 11 Craps Keno Let it Ride Pai-Gow Poker Red Dog Roulette Roulette Sic-Bo Slot Machines Slot Machines Slot Machines Slot Machines Slot Machines Slot Machines Slot Machines Spanish 21 Three Card Poker Three Card Poker Video Poker** Video Poker** Video Poker** War War War Proposition 7 16.67% 25% to 29% 3.51% 2.50% 2.69% Single Zero Table Double Zero Table $0.05 $0.25 $0.50 $1.00 $5.00 $25.00 $100.00 Pair Plus Ante + Play 5/6/800 6/9/800 6/9/1000 Go to War on Ties Surrender on Ties Bet on Ties 2.70% 5.26% 2.78% to 47.22% 15.20% 10.20% 9.10% 8.10% 5.50% 5.30% 3.90% 0.82% 2.32% 1.46% 5.00% 0.46% -0.07% 2.88% 3.70% 18.65% Footnotes: http://www.houseofodds.com/houseadv.html * Based on typical rules. Actual rules and returns may vary. 12 Appendix 2 – Mitigation and Costs Mitigation Technique Cost Deterrence Use Hidden Cameras $200-$700, $1000+ Game observers (assist $17,000 pit bosses) Entrance Detectors Electromagnetic Chips $400-$2,400 High Relatively less Wide Uncommon High Huge sunk cost since Very high they are utilized on a daily basis In some casinos, not a common feature Becoming a regular feature at most casinos. 13 Bibliography Neocheating, The Unbeatable Weapon for Poker, Blackjack, Bridge, and Gin. . Investor Relations, MGM Mirage. . Scoblete, Frank. Who's Afraid of the Big Bad Card Counters? . 14