A house edge is a mathematical advantage that the casino has over you if you play long enough. In this post, we look at the meaning of house edge, how casinos make money on different games and how you should look at the odds.
A Quick History on Gambling
Gambling dates back to a time when history, as we know it, was not even written.
Excavations at sites of the Mesopotamian civilization reveal the use of a six-sided dice dating back to around 3000 BC. The gambling dens of ancient China placed bets on animals fighting.
By the 10th century, games like lotto and dominoes (a precursor to Pai Gow) appeared in China. Playing cards in China can be seen in the 9th century, the Japanese gambling pastimes were tracked to the 14th century and the Persian game of As-Nas dates itself to the 17th century.
The first known casino, the Ridotto, opened in 1638 in Venice, Italy. It closed down in 1774 as the city government felt it was impoverishing the locals.
In the United States, gambling dens were the saloons (yes, as in the Westerner movies). In the early 20th century, the United States banned gambling through state legislation and social reforms.
It wasn’t until 1931 that gambling was legalized in the state of Nevada. In 1976, the state of New Jersey allowed gambling in Atlantic City.
Casinos around the world
Gambling centres have come up all over the world now but some are more famous than others.
Here’s a list of the most popular ones –
- Monte Carlo in Monaco is a popular casino and tourist attraction for the rich & famous. This casino is featured often in James Bond novels and films.
- Casinò di Campione is located in the Italian enclave of Campione d’Italia in Switzerland. Founded in 1917, it is today Europe’s largest casino and a most popular gambling destination besides Monte Carlo. Such is the income from the casino, that it manages the entire operation of Campione without the need for any other revenue or taxes.
- Macau is a former Portuguese colony and a special administrative region of China since 1999. Macau recently surpassed Las Vegas as the world’s largest gambling market. The Venetian Macao is the world’s largest casino.
- Singapore is an upcoming destination for visitors who have the urge to gamble. The Marina Bay Sands is the world’s most expensive standalone casino and among the world’s ten most expensive buildings.
- The United States has over a thousand casinos. This number continues to grow as more states seek to legalize casinos. On last count, 40 states have some form of casino gambling. Las Vegas in Nevada has the largest concentration of casinos in the United States followed by Atlantic City, New Jersey and then Chicago.
Recommended Article: In gambling as in life, there are very few times when humans keep emotions aside. The gambler’s fallacy is one important lesson in human behaviour where people believe in something which has no statistical basis. In this article I explain in details the everyday examples of gambler’s fallacy, inverse gambler’s fallacy and retrospective gambler’s fallacy.
Types of Casino Games
There are many types of casino games which use pure luck or a combination of luck and skill. The games created are card games, slot games, table games, number games etc.
Here’s a list of all popular casino games –
- Blackjack (21)
- Texas hold ‘em
- Wheels of Fortune (The Big Six)
- Pai gow poker
Of these the top five favourite games among casino visitors are Slots, Blackjack, Roulette, Poker and Craps.
What is House Edge?
House Edge is a term used to describe the mathematical advantage that a gambling game has over you when you play the game over & over again. This advantage results in an assured percentage return to the casino or gambling joint over time. Quite true in reverse, the house edge is the assured percentage loss of what you bet.
Let’s understand this in numbers.
If the house edge is 0.5%, it means for every $100 you bet, the casino should have earned $0.50 cents back from your initial stack. This means over a long playing time, for the $100 you bet, you are likely to take home $99.50.
Remember, all games featured in a casino are skewed in the favour of the casino. In other words, the casino has a better chance of winning than you do.
Why is House Edge important for Casinos?
The House Edge assists the gambling provider as a commercial business to cover its costs of providing the game, paying for the staff, maintaining the casino or club etc. It also helps to turn the business a profit.
This casino advantage (house edge) is the product of the games themselves and not set by individual casinos. So no matter where you choose to invest your dollar, if you’re betting on casino games, the fact is you can’t escape giving the casino it’s due.
Casino games are designed to provide predictable, repeatable long-term advantage to the casino. The games offer the players the general possibility of short to long-term gains in the short run.
This is what keeps players coming to the casinos often. And the more the player plays, the higher is the probability of the the house winning.
Example of a House Edge
A house edge (or house advantage) is created with the casino not paying the winning wagers according to the game’s true odds.
Let’s understand with an example.
House Edge example with one roll of a die
Let’s play a game which will have the roll of one die.
You can choose a number from 1 to 6 and if the roll happens to fall on your chosen number, you shall be paid four times of the money you have waged.
So, where is the catch?
Now, the true odds would be 5 times the amount wagered as there is a 1 in 6 chance of your winning number to show up. By paying only four times, the house has created an advantage for itself and a disadvantage for the player.
The house edge is defined as the casino’s profit as a percentage of the player’s original bet. Going back to our previous scenario, we see –
- Probability of winning = 1 on 6 (16.66%)
- Winning factor (multiple) = 4
- Probability of losing = 5 on 6 (83.33%)
- Losing factor = -1
Therefore, the player’s expected value = [16.66% * 4] + [83.33% * -1] = 66.64% – 83.33% = -16.69%
In other words, the house edge is 16.69%
Let’s take another example
House Edge example with American & European Roulette
In American Roulette, there are two zeroes and 36 non-zero numbers (i.e. 18 reds and 18 blacks).
This gives the house a higher edge as compared to European Roulette which have only one zero.
So, in the American Roulette, the chances of a player who bets on the red color winning is 18/38.
Correspondingly, the chance of him losing is 20/38.
The player’s expected value is – [18/38 * 1] + [20/38 * -1] = 0.473 – 0.526 = -5.26%
Thus the house edge (or house advantage) is 5.26%
On the other hand, the player’s expected value on a European Roulette table comes to –
[18/37 * 1] + [19/37 * -1] = 0.486 – 0.513 = -2.70%.
The European Roulette table’s house edge is lower at 2.70% making the European version a more player friendly version as compared to American Roulette
House Edge of Different Casino Games
The house edge of casino games varies greatly with the game.
The calculation of the house advantage for the roulette table was very easy. However it is not the case for other games which require computer simulation.
Games like Blackjack involve skills. The house advantage is arrived on an optimal play basis. This means it does not involve use of advanced techniques such as card counting.
Good blackjack have house edges below 0.5%.
Some games have an edge as low as 0.3% while for some games like Keno, the edge goes up to 25%.
Slots (a novice favourite) have a house edge of upto 15%.
Games with a high house edge will obviously pay out less on average over time compared to those that have a lower one.
You can now avoid getting stung by games where the casinos have a massive advantage over the player.
Casino.org published this list of house edge on different games
|Type Of Casino Game||House Edge|
|American Roulette House Edge||5.26%|
|Baccarat House Edge||1.01% – 15.75%|
|Blackjack House Edge||0.5%|
|Craps House Edge||0 – 16.67%|
|Keno House Edge||20 – 40%|
|Slots House Edge||2 – 15%|
|Video Poker House Edge||0.46%|
|Caribbean Stud House Edge||5.22%|
|Hold’em House Edge||2.36%|
|Sic Bo House Edge||2.78 – 33.33%|
Lessons for Investing
Just like a casino, the world of investing also offers such long-term advantages if you look at it carefully.
This reminds me of what Jeff Bezos from Amazon.com once aptly said:
I very frequently get the question: ‘What’s going to change in the next 10 years?‘ .. I almost never get the question: ‘What’s not going to change in the next 10 years?‘ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time … in our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection.
It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”Jeff Bezos, Amazon.com
A smart investor will be able to identify this “house edge”. This could mean better quality products, lower prices, beautifully crafted aesthetic products, money back guarantee, fast delivery, excellent after-sale services, prompt customer support, amazing deals, better returns, lower portfolio risk, wide selection, environmentally conscious, superior brand etc.
Here are some articles you can read to get better details on financial and stock metrics
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- Building a high return portfolio with index funds – a step-by-step approach
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- The trillion dollar index fund story that John Bogle started in the 1970s
- Best SIP for achieving long term goals