Gambling with time: how making poker machines fair would reduce the harms of gambling

Problem gamblers engage in “magical thinking” and chase their losses, even though poker machines are set to benefit the house. Flickr/Michael Dorausch, CC BY

Poker machines are a game of chance, requiring no skill to play. But players - particularly problem gamblers - often overlook the fact that they are actuarially unfair - that is, the machines are gamed in favour of the machine, not the gambler.

Australian poker machines have a return to player (RTP) of approximately 90%. The Productivity Commission reports that Australians lose $12 billion per year gambling with poker machines, of which problem gamblers are estimated to contribute as much as 40%. The same report found average problem gambler devotes 10 hours per week, losing $21,000 per year, playing poker machines.

In 2011, the Joint Select Committee on Gambling Reform recommended investgiating the viability of using low intensity machines, configured to limit gambler losses to only $120 per hour. Our paper “Could a Pigouvian Subsidy Mitigate Poker Machine Externalities, in Australia?” published in Economic Papers, considers the economic and political feasibility of using actuarially fair poker machines, configured to lose an average of $0 per hour as an alternative and potentially more effective harm minimisation strategy.

An actuarially fair poker machine would provide a RTP of 100%, which implies a price per bet equal to zero. The premise that underpins our analysis is that it is not the quantity bets placed, but revenue lost, which generates the social costs of gambling. Since revenue is the product of price and quantity, zero prices would equate to zero revenue.

One may rightly ask whether an actuarially fair poker machine would ultimately help the problem gambler. Gambling with an actuarially fair machine would not guarantee zero loss for every gambler. Winners and losers would still exist. Given a random stopping decision, the central limit theorem states that gambling returns would be normally distributed, around a mean of zero.

Problem gamblers, however, do not necessarily stop gambling randomly. In addition to high volume betting, they are observed to chase losses and engage in other forms of “magical thinking”. The parable of the gambler’s ruin states, if a gambler with finite wealth places an infinite number of actuarially fair bets against a house with infinite wealth, the gambler will eventually become bankrupt. If time were costless and unlimited, the problem gambler would in theory continue to re-gamble his/her winnings until the initial stake was lost.

In principle, gambling with an actuarially fair machine will require on average an infinite number of bets to lose an initial stake. If the RTP were 90% it would take on average 210,000, single line, $1 bets to lose $21,000. At three seconds per bet - in other words, the average Australian machine - this would require 175 hours of continual gambling. Time costs increase exponentially as RTP approaches 100%. All other things being equal, increasing the RTP to 95% would double the time costs. An increase to 99% implies a 10-fold increase and to 99.5% a 20-fold increase in time, and so on.

The aim of our proposal is to induce gambler fatigue and thereby prevent the gambler’s initial stake from depreciating to zero as it does when habitually gambling with an actuarially unfair machine. A lower price of gambling will generate an increased demand for gambling. Since the maximum bet size is fixed by the machine, further increases in gambling intensity will require an investment of more time.

Ultimately problem gamblers, who currently devote an average 10 hours per week to gambling, will be constrained by the 168 hour week. In effect, the underlying idea behind introducing actuarially fair machines is to replace the income constraint with a time constraint. The assumption being that losing time is better than losing income – for both the problem gambler and his/her family.

A harm minimisation program of this type may have several strengths not observed in alternative harm minimisation strategies. First, participation would be voluntary. Problem gamblers who currently lose in excess of $21,000 per year would have a strong incentive to seek out and gamble with the low priced machines, while non-problem gamblers could continue to gamble at their usual venue without interference.

Secondly, the capacity to induce self-selection by problem gamblers could minimise costs. Compared to a mandatory pre-commitment scheme, which would require the inclusion of nearly all poker machines and poker machine players on one database with ongoing oversight, the operation of a small number of not-for-profit poker machines is likely to be comparatively cheaper.

Thirdly, because non-problem gamblers are not affected, the political costs of implementation may be lower than a pre-commitment scheme. Finally, individuals are not required to identify themselves as problem gamblers for the scheme to be effective.

A not-for-profit casino, which provides a safer environment for problem gamblers, could offer a community service akin to providing methadone at zero prices to heroin addicts.

In principle, any philanthropic organisation (governments or NGOs) that wished to reduce the social cost of gambling, could consider this initiative. To evaluate the efficacy of the proposal it would be necessary to test if actuarially fair poker machines were substitutes or complements, to traditional forms of gambling. Future research would not only need to evaluate gambling outcomes in not-for-profit casinos but elsewhere in the community.