Session 11, Investment Section Breakfast. Moderator: Kelly Lynn Featherstone, FSA, ACIA. Presenter: David G. Schwartz, Ph.D.

Transcription

1 Session 11, Investment Section Breakfast Moderator: Kelly Lynn Featherstone, FSA, ACIA Presenter: David G. Schwartz, Ph.D. SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 Hand-to-Hand Risk Management Lessons from the Casino Floor David G. Schwartz Director, Center for Gaming Research University of Nevada, Las Vegas dgschwartz.com

3 Today s Breakfast Talk 1. Managing Table Games 2. How Do Managers Mitigate Risk?

4 1. Managing Table Games

5 How Are Tables Managed? Dealer: frontline employee (including craps stick) Box: watches 1 craps game Floor: watches 2-4 games Pit boss: supervises 6-12 games Shift manager: oversees whole casino Casino manager: sets policy, deals with shift, vendors, disputes VP casino/table games: executive leader

6 What Do Casino Managers Decide? Scheduling Table limits Game rules Issuance of credit (high rollers) Authority to comp ( free stuff) Disposition of disputes

7 How Do Casino Games Make Money? By offering negative expectation games On tables, house edge defines it Diff. between true odds and payout Roulette: 1/38 chance of hitting #, pays 35 to 1 37/38 misses, casino keeps bet 1 hit, casino pays back 35 $2 retained: house edge

8 House edge is THEORETICAL percentage of gross profit house will make on a game OVER TIME 5% house advantage: in theory, house keeps $5 of each $100 wagered

9 Volatility: Why Casinos Are Risky Over short run, great variation in predicted outcomes Over long run, more likely to regress to mean Keep winners playing=keep more money But in short run, casino can lose, particularly with high rollers

10 How Else Do Casinos Lose Money? Cheating Theft Bad decision-making (rules/comps) Slow dealing

11 Other Table Games Risks Driving off customers Unsatisfied/unmotivated/hostile dealers Lawsuits From employees, customers Regulatory issues Procedural violations Compliance issues AML

12 2. How Do Managers Mitigate Risk?

13 How to Mitigate Risk? Adhere to procedures Established rules for dealing, cash transactions, credit, comps Change rules/personnel Ban customers

14 Shot Taking Not breaking rules, but bending them Claiming misunderstanding Slows down game, costs money But cracking down may alienate good customer

15 Shot Taking Solution Estimate player s worth to casino Measure against lost time/money Allow certain % of shots for good players Don t tolerate with fleas

16 In-Depth: Card Counting Blackjack players can track cards, get advantage in some situations Not illegal But successful advantage play will cost casino money

17 Card Counting Countermeasures Flatten bets Not allow full penetration; reshuffle 1 deck in instead of 5.5 Any game but blackjack Trespass patron

18 Costs of Countermeasures Reshuffling: fewer hands/hour = less income Banning patron: losing customer Also opportunity costs of manager s time

19 How They Approach It Know counting better than counters At low stakes, allow At high stakes, friendly warning

20 Don Johnson CEO of Wyoming tech company In 2011, won $15 million from 3 Atlantic City casinos (not by counting cards) Tropicana posted negative blackjack results 1 month because of him

21 How Did He Do It? Negotiated blackjack rules to cut house edge to 0.263% Bet up to $100,000 hand Got 20% rebate on losses of $500,000 or more No minimum play, rebate reset each day Got $50,000 just to show up

22 Meaning He keeps 100% of wins Gets back 20% of losses... On a game with a 0.263% theoretical win for casino Can this end well?

23 Scenario: Playing to $1 Million W/L 3 Days Casino Gets Lucky Theoretical Win Johnson Gets Lucky Overall DJ loses $1,000,000 DJ loses $2,630 DJ wins $1,000,000 +$2,630 DJ pays $800,000 DJ pays $2,104 Casino pays $1,000,000 -$197,896 -$50,000 -$50,000 -$50,000 -$150,000 +$750,000 -$47,896 -$1,050,000 -$347,896

24 So Casino Risk Mitigation Includes Anti-cheating, anti-theft measures Solid procedures (regulatory, compliance, game protection) Understanding math behind promotional, credit, rules decisions

25 Questions? More info: UNLV Center for Gaming Research: My creative work: Thank you!