The gaming industry is big business in the U.S., contributing an estimated US$240 billion to the economy each year, while generating $38 billion in tax revenues and supporting 17 million jobs.

Slot machines have been present on military bases since the 1930s. This changed when they were removed from the army and air force bases but left in many Navy bases in 1972. The former fact was later changed in the 1980s when the slotting machines made a comeback.

What people may not realize is that slot machines, video poker machines and other electronic gaming devices make up the bulk of all that economic activity. At casinos in Iowa and South Dakota, for example, such devices have contributed up to 89 percent of annual gaming revenue.

Spinning-reel slots in particular are profit juggernauts for most casinos, outperforming table games like blackjack, video poker machines and other forms of gambling.

What about slot machines makes them such reliable money makers? In part, it has something to do with casinos’ ability to hide their true price from even the savviest of gamblers.

The price of a slot

An important economic theory holds that when the price of something goes up, demand for it tends to fall.

But that depends on price transparency, which exists for most of the day-to-day purchases we make. That is, other than visits to the doctor’s office and possibly the auto mechanic, we know the price of most products and services before we decide to pay for them.

Slots may be even worse than the doctor’s office, in that most of us will never know the true price of our wagers. Which means the law of supply and demand breaks down.

Casino operators usually think of price in terms of what is known as the average or expected house advantage on each bet placed by players. Basically, it’s the long-term edge that is built into the game. For an individual player, his or her limited interaction with the game will result in a “price” that looks a lot different.

For example, consider a game with a 10 percent house advantage – which is fairly typical. This means that over the long run, the game will return 10 percent of all wagers it accepts to the casino that owns it. So if it accepts $1 million in wagers over 2 million spins, it would be expected to pay out $900,000, resulting in a casino gain of $100,000. Thus from the management’s perspective, the “price” it charges is the 10 percent it expects to collect from gamblers over time.

Individual players, however, will likely define price as the cost of the spin. For example, if a player bets $1, spins the reels and receives no payout, that’ll be the price – not 10 cents.

So who is correct? Both, in a way. While the game has certainly collected $1 from the player, management knows that eventually 90 cents of that will be dispensed to other players.

A player could never know this, however, given he will only be playing for an hour or two, during which he may hope a large payout will make up for his many losses and then some. And at this rate of play it could take years of playing a single slot machine for the casino’s long-term advantage to become evident.

Short-term vs. long-term

This difference in price perspective is rooted in the gap between the short-term view of the players and the long-term view of management. This is one of the lessons I’ve learned in my more than three decades in the gambling industry analyzing the performance of casino games and as a researcher studying them.

Let’s consider George, who just got his paycheck and heads to the casino with $80 to spend over an hour on a Tuesday night. There are basically three outcomes: He loses everything, hits a considerable jackpot and wins big, or makes or loses a little but manages to walk away before the odds turn decidedly against him.

Of course, the first outcome is far more common than the other two – it has to be for the casino to maintain its house advantage. The funds to pay big jackpots come from frequent losers (who get wiped out). Without all these losers, there can be no big winners – which is why so many people play in the first place.

Specifically, the sum of all the individual losses is used to fund the big jackpots. Therefore, to provide enticing jackpots, many players must lose all of their Tuesday night bankroll.

What is less obvious to many is that the long-term experience rarely occurs at the player level. That is, players rarely lose their $80 in a uniform manner (that is, a rate of 10 percent per spin). If this were the typical slot experience, it would be predictably disappointing. But it would make it very easy for a player to identify the price he’s paying.

Raising the price

Ultimately, the casino is selling excitement, which is comprised of hope and variance. Even though a slot may have a modest house advantage from management’s perspective, such as 4 percent, it can and often does win all of George’s Tuesday night bankroll in short order.

This is primarily due to the variance in the slot machine’s pay table – which lists all the winning symbol combinations and the number of credits awarded for each one. While the pay table is visible to the player, the probability of producing each winning symbol combination remains hidden. Of course, these probabilities are a critical determinant of the house advantage – that is, the long-term price of the wager.

This rare ability to hide the price of a good or service offers an opportunity for casino management to raise the price without notifying the players – if they can get away with it.

Casino managers are under tremendous pressure to maximize their all-important slot revenue, but they do not want to kill the golden goose by raising the “price” too much. If players are able to detect these concealed price increases simply by playing the games, then they may choose to play at another casino.

This terrifies casino operators, as it is difficult and expensive to recover from perceptions of a high-priced slot product.

Getting away with it

Consequently, many operators resist increasing the house advantages of their slot machines, believing that players can detect these price shocks.

Our new research, however, has found that increases in the casino advantage have produced significant gains in revenue with no signs of detection even by savvy players. In multiple comparisons of two otherwise identical reel games, the high-priced games produced significantly greater revenue for the casino. These findings were confirmed in a second study.

Further analysis revealed no evidence of play migration from the high-priced games, despite the fact their low-priced counterparts were located a mere 3 feet away.

Importantly, these results occurred in spite of the egregious economic disincentive to play the high-priced games. That is, the visible pay tables were identical on both the high- and low-priced games, within each of the two-game pairings. The only difference was the concealed probabilities of each payout.

Armed with this knowledge, management may be more willing to increase prices. And for price-sensitive gamblers, reel slot machines may become something to avoid.

Often, when I am giving a public lecture or statement, I say that the federal government has endorsed casino gaming. Some people just nod, while others look confused or even contemptuous. “What do you mean?” they ask.

The first example I cite is Indian gaming: each of the three branches of the federal government has endorsed casino gaming on Indian reservations as an effective tool for economic development.

The second, not so widely known, example is military slot machines. The military has about 4150 machines on bases oversees, and they make about $120 million a year.

For those of you keeping score at home, that’s a win per machine per day of about $79. To put it in perspective, slots on the Strip make about $120 a day, while those in Atlantic City make about $200.

Looking at this only from the bottom line, I’d guess that if Peter Issacs (who is in charge of most military slots) was a VP of slot gaming at a US casino, he would have been fired long ago. Sorry, Pete, but business is business.

I bring all of this up because there is an article in the New York Times which tries to parlay the rather unexceptional nature of miltiary slots into a pathological gambling epidemic among the military.

Military gambling is a big business. About $2 billion flows through military-owned slot machines at officers’ clubs, activities centers and bowling alleys on overseas bases each year. Most flows back out as jackpots, but 6 percent remains with the house, about the same ratio as in Las Vegas.

Each year, the armed forces take in more than $120 million from on-base slot machines and $7 million from Army bingo games at home. These funds help pay for recreational programs for the troops.

But even military researchers have acknowledged that the armed forces are heavily populated by people who, like Aaron Walsh, may be especially vulnerable to gambling addiction: athletic, risk-taking young people who are experiencing severe stress and anxiety.

“And wartime is an environment that is probably creating more vulnerability than usual,” said Christine Reilly, executive director of the gambling addiction research institute at Cambridge Health Alliance, a teaching institution for the Harvard Medical School.

More than four years ago, Congress ordered the Pentagon to study how on-base slot machines were affecting military families. The Pentagon initially hired PricewaterhouseCoopers to do the study, but it ended the contract after a few months and completed the study itself.

The final report provided no new data about the rate of problem gambling. But it did caution Congress that the military could not maintain many popular programs, like golf courses and family activity centers, “without slot machine revenue or a significant new source of cash.”

One consultant who worked with PricewaterhouseCoopers was Rachel Volberg, a medical sociologist who runs Gemini Resources, which measures gambling rates around the world. “We met a great deal of defensiveness, both in Washington and on base,” she said. “Everyone was very concerned that those revenues might go away.”

She added: “Only the chaplains took this really seriously. They told us that one out of three people who come to them for counseling have a problem with gambling, but can’t tell anyone because they will be dishonorably discharged.”

Slot machines are “a very profitable operation,” said Peter Isaacs, the chief operating officer of the Army’s Community and Family Support Center, which runs the largest slot machine program. “But we do not operate them strictly to extract profit. Our soldiers have told us they want access to the same games and gambling opportunities available to the civilians they are defending.”

The military is “very passive in our advertising, and we have low maximum jackpots,” Mr. Isaacs continued. “We don’t want to encourage people to blow the rent money chasing a $1 million payout.” He added, “The vast majority of the troops use the machines responsibly.”
Temptation to Gamble Is Near for Troops Overseas – New York Times

While pathological gambling is a legitimate problem, I think the numbers back up Issacs. The win per machine per day numbers back up his claim that machines aren’t run just for profit. Like I said before, a slot manager who showed that kind of revenue in virtually any legal American casino jurisdiction would be out of a job before the finished counting the drop.

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The issue of servicepeople suffering from gambling problems points back to the general question of whether it is ethical to restrict the availability of legal gambling–something that the vast majority of the population has no problem with–because of concerns of a small minority. Since this is a question that’s hardly been answered for society at large, it’s no surprise that there’s no easy answer within the military.