How should statisticians and economists think about recreational gambling?

Recreational gambling is a lot like recreational drinking, in that it is pleasant, and it can be abused, and the very aspects that make it pleasant are related to what makes it so destructive when abused. Also, both industries make a lot of money, so there’s a continuing tug of war between those who sell the stuff and those who would ban it (along with complicated alliances such as religious conservatives and existing casinos joining up to oppose the opening of new gambling venues, and similar combinations involving competing intoxicants).

When it comes to gambling, statisticians and economists can potentially offer valuable perspectives.

On one hand, gambling is by some accounts central to both statistics and economics (just ask Savage or Neumann and Morgenstern), many of us personally enjoy gambling, and gambles can potentially help resolve scientific disputes. And this doesn’t even get into the role of betting in ensuring economic liquidity through the stock market etc.

On the other hand, gambling can be addictive as well as expensive. Sure, there are people who understand the odds and gamble small amounts just for the thrill—but lots of the profits from gambling come from people who hurt themselves and their families because they just can’t quit.

Nothing new here, I was just thinking about it after reading this news article, “For Addicts, Fantasy Sites Can Lead to Ruinous Path,” by Walt Bogdanich and Jacqueline Williams, which leads with the sad story of a sports-gambling addict and then continues:

The fantasy companies say their daily games are not gambling, contending that the games involve more skill than luck. “Our product is all about entertainment value,” said Matt King, chief financial officer of FanDuel, one of the largest daily fantasy sports providers.

It involves skill, but it’s gambling. A game doesn’t have to be pure luck to be gambling. When I play poker, I’m gambling, even though there’s skill involved. If I were to play bullet chess for money, that would be gambling too!

Anyway, my point here is that statisticians and economists have a bit of a dilemma here. Gambling, like most things, has its good and bad elements—this is obvious—but it can be a challenge to incorporate this into our discussions of betting, markets, etc.

52 thoughts on “How should statisticians and economists think about recreational gambling?

  1. The DFS companies operate legally under a special status that recognizes them as non-gambling enterprises. In truth, to play DFS is to gamble, whether or not skill is involved (it most certainly is). The companies themselves cannot acknowledge this on pain of undermining the only legal justification they can provide for their continued existence.

    The legal question is, of course, separate from the policy question, which is about the “internality” associated with gambling addiction. When players participate in a DFS contest, they are consenting adults entering into a capitalistic act, and no one has put forward any plausible third-party harms that come of this transaction. The harm in question is the consequences for a gambler (and perhaps his/her family) of imperfect self-command.

    The family issue is beside the point, I think, since people make all kinds of decisions that impact their significant others and their children, and we’re not about to begin regulating intra-family disputes (except in extreme cases like domestic violence, negligent parenting, etc.). The hard problem is whether we should deny the many people who enjoy small benefits from playing DFS to prevent the few people who irrationally incur large losses due to addiction. Some quantification of these in specific cases would seem to be pertinent, though people usually jump to one side or the other based on what kind of person they want to be perceived to be.

    Another point is that it is not clear that banning gambling is the only alternative. Having gambling institutions closely monitor and submit customers to gambling rehab is one idea, and this could be legally incentivized with carrots and sticks. Many of the (healthy) beneficiaries of gambling would likely be willing to pay a premium to play to pay for any treatment expenses for addicts, and close monitoring could help prevent massive losses before they happen in many cases.

    A more difficult question is what exactly separates gambling from all of the other activities people enter into which put their finances at risk–e.g., stock trading. Of course if we see evidence of addiction emerging in one arena more than others, fair enough, but it is an interesting question why we would see those patterns. This underscores the point, however, that blanket responses like ban all gambling, or deregulate all gambling, seem suboptimal. There are ways for the people who can safely benefit from these activities to do so, while those at high risk of large harm from these activities to be restricted and treated as appropriate, but what the rules governing these distinctions should be is going to vary case by case depending on the evidence we have.

    • If you want to not ruin it for “people who enjoy small benefits from playing DFS” why not force DFS companies to put rules in place that ceiling playtime / monies etc.

      Shouldn’t that stymie the pathological gambler while not spoiling the fun for the rest?

      • That’s a possible compromise, though it is unclear what the optimal ceiling is. Set it too low, and you take the fun out of it for a lot of people. Set it too high, and you still risk regular massive losses. My guess is that policies targeted towards high-risk people are likely to be better in social welfare terms.

        • Where in public policy is it clear, outright, what an optimal ceiling / threshold / floor is?

          The fact that we do not know the precise optimum is rarely a reason to not try at all.

        • It’s not a question of either being completely clear or completely unclear. Nothing is ever completely clear, as you say, but having more clarity is better than less. To arrive at greater clarity, we need to have a clearer understanding of what the magnitude of the benefits actually is to those who participate, the magnitude of the costs to addicts, and how those vary with different ceilings.

          The rush to regulate DFS based mostly on the suspicion that there is widespread gambling addiction and little or no value to the typical participant seems to me to be based on insufficient information about what those costs and benefits really are. Let’s try to study the issue more carefully before proposing arbitrary regulations from the armchair. While prior studies of gambling addiction and gambling regulation may have some bearing here, it would be good to see how well these prior findings apply to DFS, since they do not apply so well to many other activities that are structurally similar (e.g., stock trading).

      • As it stands, professional gamblers have already developed work-arounds for casinos/companies that try to limit their play, like runners who place sports bets in physical casinos or multi-tabling for online poker. I think it unlikely that pathological gamblers wouldn’t use the same methods, or find new ones, to get around DFS or any other rules. And at the same time, those rules would limit the enjoyment of non-pathological gamblers that do want to play a lot.

        • The casinos put limits on sports bettors, but it’s not because they want to keep the bettors from losing too much. It’s because those big bettors are the “sharps,” and the casinos are protecting their own bottom lines and betting lines.
          If DFS put restrictions on bettors, the professionals — the quants who wind up with 90% of the winnings — would figure out a way to get around the rules. But ordinary players might be deterred by the inconvenience.

        • Ordinary players maybe, but we’re concerned with problem gamblers. Alcoholics hide their drinking; I don’t see any reason to think that addicted gamblers won’t figure out how to open multiple accounts, etc.

    • I don’t see any way in which it is capitalistic to engage in pure gambling.
      It’s true though that for some people highly speculative investing especially so has some of the same characteristics. One the the securities industry had to do to get broad participation in the markets, starting back after the US Civil War was to convince people that it was not gambling. If you Google speculation gambling difference this is something that there are many discussions of. In the US speculation is highly regulated, which is part of what the Securities and Exchange Commission does and why you see those long disclaimers about past performance not being a guarantee of future return.

  2. As a person who enjoys the occasional trip to Vegas, I find the United States’ approach to gambling very odd. Few people have big complaints about lotteries or horse racing or March Madness office pools, but they go crazy over poker and blackjack and sports wagering. Some states ban games of chance while other ban games of skill. As you allude to, it’s like people can’t even agree on what gambling is exactly. Certainly no one says that it should be illegal to put money in the stock market for retirement, but that’s as much a gamble as a poker pro playing against an amateur.

  3. ” When players participate in a DFS contest, they are consenting adults entering into a capitalistic act, and no one has put forward any plausible third-party harms that come of this transaction. The harm in question is the consequences for a gambler (and perhaps his/her family) of imperfect self-command.”

    The same can be said of opiates, opioids, cocaine, cigarettes and alcohol consumption. Many lives are destroyed by all of these things. And, to date, our society has chosen to ban all but the last two, and minimally regulate those. One can argue about the wisdom of those policies. But if you look around at the lives and careers laid to waste by addictive behaviors in society, the neo-liberal approach is clearly inhumane.

    “The family issue is beside the point, I think, since people make all kinds of decisions that impact their significant others and their children, and we’re not about to begin regulating intra-family disputes (except in extreme cases like domestic violence, negligent parenting, etc.). ”

    OK. I’ll go far out on the statist limb and say that, in my opinion, we don’t do nearly enough to protect people from intra-family harms. I would also point out that pathological gamblers destroy businesses by either embezzling funds or running them into the ground–which in turn causes innocent people to lose jobs, etc. The externalities are there if you look for them. By the way, have you ever noticed how impoverished the communities around the major gambling resorts are? Do you think that’s a coincidence?

    “Having gambling institutions closely monitor and submit customers to gambling rehab is one idea, and this could be legally incentivized with carrots and sticks. Many of the (healthy) beneficiaries of gambling would likely be willing to pay a premium to play to pay for any treatment expenses for addicts, and close monitoring could help prevent massive losses before they happen in many cases.”

    Now we have something we can talk about. But here’s the thing. I haven’t investigated this in any depth, but it is my understanding that without the hard-core gambling addicts to prey on, the commercial gambling would not be economically viable. The amount of profit you can make from casual gamblers looking for a little entertainment but able to control themselves just doesn’t pay the freight. So attractive as this approach seems in theory–perhaps the only one Ram and I could agree on–I question whether it could actually be made to work in the real world.

    “…blanket responses like ban all gambling, or deregulate all gambling, seem suboptimal.”

    Yes, but it seems to me that the line should be drawn at commercial gambling. The friendly poker game among friends, the office betting pool on a sports event–all that is fine. But once you put massive capital and marketing behind it, you are just trawling for addicts to prey on.

    • Re: drugs–I agree. With drugs we have the same issue of a large majority who are capable of responsibly deriving a lot of utility from them, but non-negligible minority whose lives can easily be ruined by them.

      Re: family–maybe, I’d be interested to hear what proposals you have here.

      Re: businesses–Arguably management/shareholders ought to be doing background checks on people they put in positions to destroy companies. If something comes up about a gambling addiction, and a history of poor decisions related to it, then the company that appointed them anyway perhaps ought not to be protected from its mistake.

      Re: profitability–For certain kinds of gambling, this is likely true. For DFS, the companies do not make any money from the losers. The losers pay the winners, and the company takes a cut from the winnings. The companies know in advance exactly how much profit they will make from each contest they host, regardless of who is participating. So this is not quite the case with respect to DFS.

      Re: marketing–Again, those who prey on addicts should be incentivized to detect and pay for their treatment. This includes the marketers. This is possible without imposing any blanket bans.

      The key point is not to decide whether some social activity costs more than it benefits, tout court, but instead to figure out a re-configuration of the activity that minimizes its costs and maximizes its benefits. The ban-or-no ban debate makes it seem like these are the only options, but there is a continuum of intermediate policies that would allow for finer tuning to allow the beneficiaries to benefit while limiting the losses of the losers.

    • Speaking of trawling for addicts to prey on.

      From 10_Ioannidis.pdf from ASA supplement http://amstat.tandfonline.com/doi/abs/10.1080/00031305.2016.1154108

      “Misleading use of P-values is so easy and automated that, especially when rewarded with publication and funding, it can become addictive. Investigators generating these torrents of P-values should be seen with sympathy as drug addicts in need of rehabilitation that will help them live a better, more meaningful scientific life in the future.”

      • That’s pretty patronizing (of Ioannidis). I think writing stuff like this detracts from the substantive message.

        It also alienates the other side & makes productive dialogue difficult. Comparing someone to “a drug addict” is a discussion killer.

    • “I haven’t investigated this in any depth, but it is my understanding that without the hard-core gambling addicts to prey on, the commercial gambling would not be economically viable.” The casinos turned completely around on this distribution. It used to be that they made 80% of their money on the whales at the tables. It’s not clear how many of these gamblers were addicts and how many were just guys with a lot of money who really liked to gamble. The slots were there to keep girlfriends and wives occupied. Now 80% of their money comes from the slots. That’s partly because the machines have become more addictive. What it means is that the casinos have turned a lot of customers into situational compulsive gamblers. I would guess that a lot of them go home feeling chagrined and vowing not to do it again. Some break that vow, like the Iowa woman in the post Andrew links to, who, with the great assistance of the casinos, became disastrously addicted. I have no idea what the proportions of each type are.

  4. For gambling and liquor — and many other things — we need a bit more of the perspective of Aristotle.

    A cartoon version of “moderation in all things” is here: http://existentialcomics.com/comic/113

    This is a measurement challenge, because we find it easier to use scales where there is a desirable end and an undesirable end.

    I know I often tend to think of issues like this in terms of measurement, but that’s my bias. Do we have decent ways to approach the issue of how much gambling is too much (for me, not in general) and similarly for alcohol (which may have genetic predisposition issues)? And, of course, if we had such a measurement, where to we see an acceptable political line between nanny state and saving families from addiction? But without measurement we are managing by anecdote and bias.

    Like you, I see the argument that “it’s skill, not gambling” as completely bogus. It seems no different than betting on horses — clearly gambling, but also amenable to skill.

  5. I think the analogy between gambling vs stock trading is a stretch. Stock trading fundamentally has a huge upside: the creation of productive enterprises.

    Is the upside of something like an online poker site anywhere close to this?

    It’s the difference between a mega benefit with a minor side effect versus a mega loss with a tiny upside.

      • +1

        Additionally, gambling that takes place in a prediction market also performs the socially useful function of aggregating publicly available information about future events (e.g., sports betting odds, presidential election probabilities, etc.). I don’t trade in the political prediction markets, but I check out the prices daily, and derive a bit of utility from doing so.

        • Indeed. And that’s why I’d be more loathe to regulate a prediction market or a futures market than say an online casino.

          The positive utility of various sorts of gambling is grossly different though how much would stay subjective.

    • Daytrading, high frequency trading, naked shorting, derivatives leveraging ordinary transactions by huge multiplicative factors and magnifying the incentives for active destruction…..

      just saying there’s more than a fine line between holding a principled belief in the efficient deployment of capital and supporting many of today’s “investment” vehicles. When value is “created” and “destroyed” in milliseconds, and at 1000% leverage to underlying assets, it’s on a completely different time scale than what ordinary people would understand as productive economic growth.

    • The issuance of stock can create productive enterprises, just as the issuance of new bonds provides capital.

      But once the stock or bond has been issued, none of the further stock/bond movement accrues to the company at all, and has no effect on the later company productivity (until/unless they want to issue further stocks/bonds).

      So if I buy or sell IBM, IBM is unaffected (IBM shareholders, which include management, are affected). I’m making a gamble that IBM perform better/worse than competing investments.

      So why should I buy stock rather than gamble? Basically it’s because in an expanding economy the pie gets bigger overall, so it’s not a negative sum game (as with casino gambling) but a positive sum game (as the economy expands).

      • I was thinking the same thing at first, but then I had another thought. Without the existence of a stock market, there’s much less incentive to make the original purchase of a newly issued stock, right?

        • @Z Correct. Otherwise you’d be buying something that wasn’t liquid (i.e. hard to sell readily, like art). So the existence of stock trading does make it easier to set up productive enterprises.

          @Rahul — By definition, you are only an owner if you have stock.

          The stockholders and managers who own stock (or options) care about the stock price, but it only affects the company itself if it needs to sell more stock or access the credit market (e.g. sell bonds).

      • What do you think happens to the money when you gamble at a Casino? That it disappears? That it does not go back into the economy in the form worker pay, payments to vendors, casino industry service providers, etc., etc., etc.?

      • @zbicyclist

        But often, don’t the owners retain stock? Or top management? So stock prices affect their worth so they do care. And hence there’s incentives to not let your stock prices crash.

        Also, if your prices crash you (say, a big stockholder) are exposed to the risk of someone else buying & seizing control?

        If your stock prices crash it will also adversely affect your ability to run your business in indirect ways. You cannot access credit as well, nor get debt or working capital, perhaps not even great employees because most counter parties will view the stock price crash as a market signal of the firm not doing things right.

        Finally, the “unless they want to issue further stock” qualifier is moot. Which Firm doesn’t, in the long run?

    • “If you bet on a horse, that’s gambling. If you bet you can make three spades, that’s entertainment. If you bet cotton will go up three points, that’s business. See the difference?” (Blackie Sherwood, Dallas Sportswriter as cited in Mike Orkin, 1991, Can You Win? The Real Odds for Casino Gambling, Sports Betting, and Lotteries, page 1).

    • For the society and economy, there’s a difference between gambling and stock trading. For the individual, not so much. Long ago, when casinos were only in Las Vegas and there were no state lotteries, I was hanging around compulsive gamblers. Most of them preferred sports and horses. But one guy had lost a lot of money in the stock market, and he thought it was gambling, at least the way he did it, which was not buy-and-hold.

  6. As someone who has consulted for the government in the “luck vs. skill” distinction I note that it has, as Ram notes above, almost nothing to do with the public policy issues. Further, the luck vs. skill issue is usually malformed in any case.

    Skill or no skill, anything with variance in results could be called gambling. In that sense, to banish gambling would be to banish virtually all voluntary human activity. The sort of gambling we focus on here has an expected negative payoff in dollars, where the expectation can be formed by construction. “Skill,” to the extent it is important, creates a relevant subset of the population whose expectation is not negative, although the variance could still be quite high. Note that poker, for example, in which the negative expectation in aggregate can be estimated fairly precisely (the house rake) higher expectations by some cognizable (in advance) subset of players creates even lower (negative) expectations for the rest of the players. There might also be gradations of skill in which expectations for some cognizable subset, while still negative, are less negative than the rest of the population.

    Obviously, the negative expectation in dollars is offset by utility, as it is in large swaths of human activity: movies, sporting events, theater, dance, restaurant meals, etc. One needs a pretty good model of personal decisionmaking to conclude that someone who blows $1,000 in Las Vegas at the Bellagio craps table is somehow less rational than the personal who spends $1,000 on scalped Cirque de Soleil tickets, a table at a bottle bar in a DJ club or the services of a Vegas prostitute that same evening.

    • Jonathan:

      All good points—and, indeed, there’s no “luck vs. skill” issue for problem drinkers, but the drinking can still be a concern.

      The negative expected monetary value of gambling is relevant because it is one of the main ways by which gambling can destroy people’s lives. Consuming alcohol has negative expected monetary value, and alcoholics can go broke, but it’s my impression that the main ways that alcohol hurts problem drinkers is through its effects on personality and health. Gambling’s special destructive thing is what it can do to your bank account. So, the problem with gambling having an expected monetary value is not that it is irrational in some abstract sense but is that, like a leak in a boat, it can take away all of your financial resources. If you’re addicted to high living in other ways (going to Cirque de Soleil every week?), that could wipe you out too, but gambling for many people seems to be specifically adapted to that task.

      • Thanks, TB.

        I may be an economist but ruining your finances doesn’t strike me as worse than ruining your personality and/or health. And for every problem gambler I know, I know 20 problem drinkers. That’s just a convenience sample, and the national numbers that I’ve seen aren’t quite that bad, but that doesn’t take into account co-morbidity. This article http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1495100/ cites studies that pretty well link alcohol problems with gambling problems: “For example, a recent survey study of 2,638 adults in the United States found an odds ratio of 23.1 for current alcohol dependence with current gambling pathology.8 An even stronger association between alcohol use and gambling disorders was observed in the higher socioeconomic status group in which having alcohol abuse or dependence increased the odds of being a problem or pathological gambler by a factor of 66.” I suspect there’s a lot of causality running from lowered alcohol inhibitions to gambling. My basic take is that we should do for gamblers what we do for alcoholics — wait until they recognize they’ve messed up their lives and subsidize their ability to get back on track. Stopping them from messing up their lives in the first place looks impossible to me.

    • Perhaps we intervene when a “negative-expectation-in-dollars” activity starts to achieve organization, efficiency & scale?

      i.e. We target Casino’s for regulation because they have achieved assembly line efficiency & scale.

      Maybe if a Prostitution Mega Corp emerged that started targeting people across the nation by sending custom selected prostitutes every week, policymaking would take notice? Or if hundreds of thousands of middle class people started blowing $1000 on scalped Cirque de Soleil tickets.

  7. Has anyone ever quantified “lots” in this sentence?

    “…but *lots* of the profits from gambling come from people who hurt themselves …”

    If so can you point to a paper or other data to help define “lots?”

    Thanks!

    • I don’t know it for gambling, but for alcohol, there’s a lot of public data. This post explains it nicely (and links to the source data):

      https://www.washingtonpost.com/news/wonk/wp/2014/09/25/think-you-drink-a-lot-this-chart-will-tell-you/

      There’s reason to believe it’s similar for gambling.

      Andrew Gelman asks how statisticians and economists should think about recreational gambling, but there are two parts to that question as I see it: How to view the use of gambling services, and how to view the offering of gambling services.

      Many people say that we shouldn’t stop people pursuing their happiness just because they pursue it in self-destructive ways. No matter to which degree you agree with that, I think there are good reasons to limit how people can profit from other people’s self-destructive habits. And the gambling and alcohol industry are unfortunately, like the tobacco industry, entirely dependent on ruining people’s lives to stay afloat.

      • Think about your claim for a moment. Why would a company or an industry for that matter want to destroy their source of revenue?

        There is so much moralism and faulty assumptions that seep into discussions about these things that it is difficult to have a reasonable one.

        It resembles the current political climate in this country.

        • Think about your own claim for a moment: Couldn’t you use the same argument to argue that a slaveowner would never mistreat a slave? There’s a difference between harming someone, and destroying them as a source of revenue. Just because you desire toin profit from someone, doesn’t mean you have to have their best interests at heart.

          For that matter, even if they do completely run a customer into the ground so they can’t profit from him anymore, there are other customers. As a group, alcoholics and gambling addicts are in no danger of extinction.

        • That’s not an unreasonable and hyperbolic analogy, now is it?. What’s next Harald, comparisons to Hitler and Auschwitz? It does not even make sense as an analogy.

          Having someone’s best interest at heart is what all non-casino related companies do? Is that your argument?

          If there are industry practices that do in fact undermine their customers ability to continue to be a customer, they are short sighted in the same way toxic mortgage assets bundled into financial instruments were shortsighted.

          There clearly are people who cannot control their gambling and who should not gamble and I am all for doing things to help those people not do so. That said, that is not the vast majority of people who go to casinos and spend money.

  8. Ah, the fallacy of the one-sided bet. There are essentially two options:

    1. Ban gambling. People will still look for ways to gamble (see unofficial poker tables) or travel to the places where it is allowed (see Vegas, Atlantic City, casinos all over the world). Demand has been reduced for the population at large, but still exists, and the people susceptible to addiction will be a larger proportion of the people who do engage in gambling. Thus, a large proportion of the negative social effects will still exist. Add to that the negative social effects from risky activities (gambling money at unregulated online scams) and the money that is going offshore instead of staying in place, and you get a larger societal onus than before.

    2. Allow gambling. It can thus be regulated and turned towards good purposes. Some people will be addicted, but they are a lot better off being addicted to a legal activity, because the government will be able to help/monitor, than to an illegal one which the government will turn a blind eye to.

    You will note neither choice that leads to an outcome of “no gambling”. The choice is only between “regulated gambling” and “unregulated gambling”. Much like scientists (and pundits) cannot choose to use “no statistics”; the choices are “good statistics” and “bad statistics”

    • Luis:

      Governments in the U.S. do neither 1 nor 2. As you note, they regulate gambling, encouraging it in some places (for example, with big ads on billboards and bus stops encouraging people to throw away their hard-earned money to the state lottery) and discourage or make it illegal in other ways.

  9. Can an objective line be drawn between gamble versus skill? Andrew Gelman seems to call it gambling whenever in contains some aspects of gambling: “A game doesn’t have to be pure luck to be gambling.” True, but then…..what is and isn’t gambling? Skiing has some gambling in it – some athletes have nice snow, others may have molten snow and will therefore be much slower. All sports with referees have some degree of luck – the referee may take a decision that favors you. And so on. In fact, the attractiveness of sports events is that there *IS* some luck involved, that outsiders may win, that it is not completely predictable.

    The matter is relevant. For instance, in The Netherlands, the supreme court has recently judged that poker is indeed gambling. But – how can there be professional poker players if it were gambling? Then it would not be possible for poker pros to earn money (in the long run), right?

  10. I’m a poker player and have a bit of a libertarian attitude with respect to gambling, partially because I enjoy poker so much. Of course, I can see its downsides, and when I play in the cardroom, I certainly do see people making “bad” choices.

    In any event, the luck vs. skill thing is a red herring people use to justify poker/DFS being legal.

    Is an enterprise any better because the better/smarter players routinely take money from the worse/stupider players? We are essentially redistributing wealth from the dumb to the rich, over time. At least in roulette, everyone loses equally. In poker, the dumb lose and the smart win. That’s one reason I like the game and play it.

    But it doesn’t seem anything like a moral justification for poker being good and other games of chance being bad.

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