How do online casinos continue to profit millions of dollars per year? What statistical, psychological and marketing tactics do they use to convince people to give up their hard-earned money for a few moments on slots with flashing lights and music? They do this by exploiting human cognitive biases, the neurobiology of reward, clever marketing tactics and the widespread ignorance of statistics.
This post will examine the mathematics, cognitive psychology, neuroscience and advertisement behind how many online casinos get people to play their salary and sometimes their entire saving away. In the end, the only way to win is not to play. If you visit Las Vegas, spend your money on good food, exciting activities and entertaining shows.
Gambler’s ruin: players can never reliably beat the casino regardless of betting system
A lot of gamblers think that they have found a betting system that allows them to get an edge over the house. The trouble is that no such betting system actually exists. This is because casinos have engineered their system to always give the house an edge over the player. A common betting system is known as the martingale system. It is based on the idea that if you lose, you double your bet. If you win, you are back over break even and reduce the bet down to the baseline again. However, simple mathematics shows that this is not a sustainable system. If you start by betting $5, then it only requires 10 losses before you are forced to bet $5120. On the 11th loss, it is $10240. Most gamblers do not have this kind of money, and will soon run out. Furthermore, a lot of casinos have a maximum limit for bets, so you cannot apply this system beyond a certain amount.
All other betting systems have similar flaws.
The primary reason for this is that most casino games have a negative expected value (commonly referred to as the house’s edge). A simple way to see this is to multiply the probability of winning with the payoff and sum over all possible winning outcomes and compare this with the bet. In virtually all cases, the bet figure is going to be larger. This means that, on average, a person will lose money as he or she continues to play.
Even if a casino game did not have a negative expected value, but a neutral one, the player would most likely run out of his or her money in the long run, since such a game would be a random walk. Of course, no casino would allow a moderate or large positive expected value, since that means that the casino would lose in the long-term, which is not a viable business strategy.
Gambler’s fallacies: exploiting human cognitive biases
Online casinos (and most forms of gambling) exploit human cognitive biases, such as confirmation bias, gambler’s fallacy, the hot hand fallacy, irrational escalation, base rate fallacy, and wishful thinking.
Confirmation bias makes gamblers more strongly remember the times they win than the times they lost. They might reminisce about that time they “won big”, but fail to remember all those times they lost and that those loses are much larger than their one-time win. The hot hand fallacy convinces people that they are “on a roll” and makes them continue playing (and thus lose in the long run) even though each bet is independent. The gambler’s fallacy makes people who lose continue to playing in the belief that it all even out and they will start winning again soon. Irrational escalation will make players bet more despite having a bad hand because they have already have a lot of money on the line. Base rate neglect distracts players from understanding that the probability of winning is low and wishful thinking encourages people to think that they will soon win it back.
A lot of gamblers think that they can “stop while ahead” and thus reduce the negative consequences of casino gambling. However, a player who is currently winning has a clear financial incentive to continue playing. After all, he or she is winning! This often works in close connection with the other biases above: continue playing while ahead because the player thinks he or she is winning and continue playing while losing since the “luck will soon change” (gambler’s fallacy) means that the player will continue to play regardless of outcome. These cognitive biases conspire together into a perfect storm and strongly influences people to continue playing. As they continue playing, they will eventually lose.
Gambler’s gullibility: manipulation and extreme terms behind “free spins” and “matched deposits”
How do online casinos get people to play? They use a lot of advertisement on television and the Internet that either revolve around giving out supposedly “free” stuff, reducing or eliminating risk or perhaps claim that they donate some of the profit to charity. These ideas are based on solid psychological research and their goal is to manipulate you into playing. If they give you free stuff, you develop a sense of obligation towards them, and when they cut down on the risk of casino play, they are reducing your reasons against playing. If they claim to give money to charity, they are playing on your moral and emotional support for charity, as well as exploiting the halo effect whereby being charitable increases your appreciation for them in other areas.
It is not something that they do out of carelessness, it is not something they do because they care about you as a player and it is certainly not something they do because they care about alleviating human suffering through charity. They do this to get you to play and spend money at their casino. It is purely a method of increasing the chance that you will play at their casino and subsequently lose money and increase their profit.
A profit-driven casino cannot afford to give out free stuff if it leads to a net loss. So how do they prevent making a loss on giving out allegedly “free” stuff? There are two main methods:
(1) They calculate the precise level of stuff they can give away and make sure their winnings from getting you to play is larger. So even though you seem to be getting stuff “for free”, you almost always end up paying in more to the casino than you get out.
(2) Make use of extreme contract terms, so that although you get a lot of free spins and bonuses, you can only withdraw any winnings if you turnover around 35 times that amount. Then they know they have you. If you get free spins to a value of 50 USD, you need to turn over 1750 USD. Since there is always a negative expected value for casino games, this means that most of that is coming from the player’s own pocket. So they are not truly “free”.
So let us check the contract terms for a selection of online casinos that was used at the time of this writing:
|Online casino||What “bonus”?||Requirement for bonus withdrawal|
|Casumo||€1200 / 200 spins||25x wagered for bonus, 30x for “free” spins|
|888 Casino||$200||30x wagered|
|Leovegas||200 free spins||35x wagered (with bonus money, real money does not count)|
|Mr. Green||240 free spins||35x wagered (with bonus money, real money does not count)|
|Ladbrokes Casino||$60||15x wagered, additional deposits required|
It is safe to say that most people will not benefit financially from these alleged “bonuses”.
Gambler’s addiction: tapping into the brain’s reward system
Online casinos hijack the brain’s reward system by offering a lot of small and quick rewards and may involve multiple neurotransmitter systems, including dopamine, serotonin and norepinephrine. This means that human neurobiology is yet another factor that influences gambling. Despite having various efforts at “responsible gambling”, online casinos is probably a major contributor to gambling addiction. About 5% of the adult population suffers from gambling problems.
Gambler’s advertisement: spamming online and TV commercials
In recent years, the amount of advertisement for online casinos on the Internet and on television has exploded. In Sweden, gaming advertisement in total increased by 75% during 2014 and television advertisement increased by 90%. This occurred despite the fact that it is both illegal to advertise casinos in Sweden and despite the fact that casinos are not licensed to operate in Sweden. Online casinos intentionally circumvent this kind of legislation by airing their ads on television channels that are not based in Sweden (which includes many classic “Swedish” television channels). They are typically registered somewhere else (such as Malta) and letting people play on the Internet.
Why do online casinos, who want to increase their profits, spend hundreds of thousands of dollars on online and television commercials? Because it works.
Do not buy into the fancy marketing ploys used by casinos. They have rigged the game so that players will almost always end up losing money. Do not go into a gambling situation thinking that you will win big. It is probably better to spend your hard-earned money on tasty food and entertainment if you ever visit Las Vegas.