If Pyramid Schemes Are Illegal, So Should Be The Slot Machines
We’ve all seen them. They are astonishingly simple to use. Just pull the bar, and three reels start frantically spinning, only to grind to a halt at a square, the number three, and a banana. Shame, you didn’t win this time but after parting ways with another 50 cent coin and watching the reels settle at not one but two bananas, the machine gets terribly excited, telling you that you won 4 dollars. Fantastic.
At this stage, you might have the impression that breaking the casino is in fact a viable scenario if you just keep on losing 50 cents but winning 4 dollars. Unfortunately, this feeling is exactly what keeps customers of online casinos going back and ultimately this is the feeling that make the customers poorer and the casino richer. Merely getting excited when you win is neither a surprise nor a sin. We are only humans.
The problem arises with the fact that operating slot machines is perfectly legal. For those who like to point out inconsistent practices in our lives, this rings some alarm bells, especially when considering that operating a pyramid scheme is illegal, as they should be.
The reason for this is that they rely on luring in people by falsely indicating how much money they could earn, get them to invest and leave them to their own devices. Eventually, they find out that people do get suspicious about going on 4 party holidays for a total of 300 dollars a year. “If you get 5 people to sign up and they get another 5 people to sign up, there are 5 x 5 = 25 people working for YOU!”
Familiar? Well compare it to this: “You have lost 50 cents in the 3 earlier rounds but earned 4 dollars in this one. That’s 2.50 dollars profit in just four spins, and you might earn even more in one spin!”. Pyramid schemes and slot machines draw people in because they exploit the same combination of cognitive features: A) the motivation to earn money and B) poor judgement on the likelihood of actually earning the money.
In order to see this analogy better, the basics of why slot machines win “every time” needs clarifying (maths is involved only as far as multiplication, I promise), after which it will become clear how it doesn’t make much sense to keep them legal.
One minute slot machine summary
If customers lost on every single round, no one would play. If they lost 50 cents 60% of the time and won 50 cents 40% of the time, they would get suspicious and start counting the wins/losses. In the end, they would uncover the 60/40 success ratio and (again) would leave. So here comes the remedy.
Lose 50 cents 90% of the time and win 4 dollars 10% of the time. Can you tell me within 3 seconds if this is a good or a bad deal? In general, the human brain can’t, and it definitely stands no chance if the winnings/losses are not based on only two outcomes as above, but on 9 x 9 x 9 = 729 outcomes, all having different pay-outs (considering a three reel machine with 9 things on each reel).
We don’t have to dwell on the details of such a large number of possibilities because actually, you can unveil the long term financial prospects of a slot machine with just four numbers: (1) the proportion of wins, (2) the proportion of losses, (3) the average amount you win when you win, and (4) the average amount you lose when you lose.
So let’s have a look at the proposition above, as this scenario is actually reflective of what you could expect from slot machines. If the game says you win 4 dollars in 10% of the spins and lose 50 cents in 90% of the spins, that actually means if you did 100 spins, you would lose around 5 dollars. (For those interested, you just calculate the expected value of one spin, -5 cents, then times it by 100 spins.)
Most importantly however, the fact that you lose 5 dollars after 100 spins is no longer up to much uncertainly. For every 100 spins, you will lose 5 dollars each time you finish. This is not at all bad from the perspective of everyone involved. From the casino’s perspective, if it gets 10,000 people to do 100 spins every week, that’s 5 dollars x 10,000 people x 4 weeks = 200,000 dollars profit for a month. Every month.
The big picture
Homo Sapiens is great at cooperating in large numbers, and large numbers mean power. You can’t build pyramids, go to the moon or stage revolutions with 4 people. With 100,000 however, you have a fair chance of transforming your environment into useful things.
Novel wonders like steam engines, computers, smartphones, cars will help you in several ways in creating some truly amazing things and experiences, but also come with some side effects by simultaneously creating pleasurable but socially dangerous opportunities for speeding, stealing from those you don’t know, and allowing anyone to start a business which is basically a scam etc… To prevent these side effects from materializing, we call on additional large-scale cooperation and devise laws as well as their enforcement to keep these side effects under control. Sometimes, this theory manifests in a spectacular fail. Sometimes it works and makes Pyramid Schemes illegal.
These schemes are illegal because they exploit the inherent motivation to earn money, but never truthfully declare how much you can expect to earn. Otherwise, they would need to say: “99.9% of people who invest the 300 dollars never make a cent. But you might make 5,000 dollars in 3 weeks!”. Certainly not as promising as having 25 people working for you.
How about slot machines? They (again) exploit an inherent motivation to earn money and hide your essentially certain long-term losses under a blanket of complex and unexpected pay-outs/bonuses and literally flashing lights. If they were required to talk about stats, they would say: “On our slot machines, 99.9% of people lose money. But you might not!”
These two things seem oddly ridiculous, as well as oddly similar.
