How gambling is so profitable as business? Why do people prefer to gamble to gain additional income?
Conventional economic rules would predict that if someone offered you a deal where you gave them $100, and they gave you $94.80 back, you wouldn’t take that deal. But for some strange reason, perfectly intelligent people head to the roulette table every day and, in essence, take that exact deal.
An illusion of 50/50 probability
An American roulette table has 38 numbers on it, double zero, zero, and one through 36. The best odds on the table are in the red, black, even, and odd boxes. If you put a $5 chip in the red box, for example, and the ball falls on a red number, you double your money. You gain $5. But of course, the ball can fall on zero or double zero, which are neither red nor black. Now, if the zero and double zero didn’t exist, then playing roulette would make perfect sense. If you came in with $100 and played infinite times, you would leave with $100 because it would be a 50% chance of doubling your money each time. In reality, because of those zeros, the odds of doubling your money are actually 47.4%. That means that for every dollar you play, you can expect to lose 5.2 cents. It is even hard to estimate, calculate and predict in slots, since each and every machine, and online slot has different algorithm and statistics, and it makes it even more tempting for gambler to try to outplay them.
But for some reason, people still do it. While, this small gap in between fair odds and the odds casinos and other gambling institutions offer earn them worldwide close to half a trillion dollars per year.
How are we eager to be caught in the perfect trap?
In a gambling transaction with someone who bets and someone who accepts the bet, both parties actually find what they’re doing worthwhile. The casino finds what they’re doing worthwhile because they make money, while the better finds what they’re doing worthwhile because they have the possibility of winning lots of money.
Now, the explanation for why people prefer these low probability bets moves further away from economics into psychology. But one explanation with the lottery, for example, is that a bet doubling one’s money does a little to change one’s quality of life. But a bet multiplying a person’s money by a factor of thousands can be truly life changing.
So people are betting for monumental change rather than for another cup of coffee. To summarize, what this all means is that a 5% chance of $100 is worth more to people than $5, despite both having a monetary value of $5. Therefore, by offering gambles, people can make money more powerful. Almost everywhere in the world, there is an issue of low savings rates. People don’t put enough money into banks.
Why people prefer to gamble than save their money?
About half of Americans could not immediately come up with $2,000 if an unexpected expense came up, according to one survey. A big reason for this lack of savings is that banks are not incentivizing enough with how tiny savings accounts interest rates are. Many people just don’t see a reason to put their money in banks, and banks are unwilling or financially can’t increase their interest rates.
Economists created a concept for what’s called a prize linked savings account. A normal savings account with $2,000 in it at a bank that offered 1% annual interest would earn $20 a year. But with a prize linked savings account, instead of being given the $20 in interest, it would be entered into a gamble with, for example, a zero 4% chance of winning $5,000. As always, that gamble is still worth $20 monetarily, but to the gambler, it’s worth more.
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These prize link savings accounts have been incredibly successful at getting people to save. In Michigan’s trial of the system, 56% of those using it were first time savers. These same principles are the ones that make lotteries work. In fact, lotteries are just such easy ways of making money that in many countries, privately run lotteries are illegal. In the US, for example, all lotteries have to be state run, and their profits usually go to funding education.
Because the States are guaranteed to make money from the lottery, it is essentially a form of taxation. In fact, all forms of gambling are set up in a way that they’re guaranteed to make money for whoever is running them in a casino, at a racetrack, or with any form of gambling. It’s never a good deal for the better. But the reason why people engage in these deals is a fascinating study of behavioral economics, and its principles, if applied correctly, can sometimes just maybe be used for good.
Additionally, to all the information above, gambling is just far more exciting for our thrill-craving brains. Rushes of dopamine, when we win our bet, are addicting and drag us to gambling more and more. Putting money on saving account are stable, passive way of managing finances, while gambling simply bring us entertainment and possibility to win a lot without a hassle of waiting years for the savings to build up on the account.