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IN-DEPTH 25 September 2017
Ed Thorp: The Man Who Changed Casino Gaming
Nicholas G. Colon looks at the indelible impact Ed Thorp has made on the casino industry ever since he showed players how to Beat The Dealer
By Nicholas G. Colon

I am not certain if a list of the most impactful people in casino gaming has ever been formally compiled by any reputable body of ‘experts’ - a term I use very loosely. If there was such a list, somewhere near the top would have to be Professor Ed Thorp. Ed Thorp’s contributions to the gambling industry span a monumental career that has extended over six decades, and is now chronicled in his new book A Man For All Markets.

It all started when Thorp and his wife Vivian had taken a trip to Las Vegas in the late 1950s. Professor Thorp states: “After playing blackjack there were things that I noticed about the game that didn’t fall in line with what was thought to be true about the game.” This got him thinking about ways to attack the game for profit. Thorp then got work analysing the game and ultimately making some very ground-breaking conclusions.

In 1962 Thorp published the book Beat the Dealer that presented the conclusions of his research. It was the first widely available publication that gave a firm mathematical proof on how a player could beat the game of 21. And simply stated, it changed everything in casino gaming. When casinos found out that one of their games was vulnerable to a skilled player, they changed the rules of the game (essentially overnight) so that Thorp’s analysis was no longer valid.

When customers found out that the casinos were not playing fair, the customer levels at the casinos dropped dramatically, with hotel and casino occupancy levels nearing zero. After only a short time (a few months) the casinos were forced to reinstate the original rules that governed the game of blackjack.

The marketing value of this rule reinstatement can’t be understated. Every person who walked into a casino believed that they too could beat the casino; this caused a flood of players to frequent casinos on a regular basis. Knowing that it is possible to beat a casino game gave the players all the motivation they needed to try their luck at the games of chance. The player rates jumped dramatically post-reinstatement of the original rules, even surpassing the original base line values. And the numbers just got bigger from there.

With this dramatic jump in occupancy the casino resorts became bigger, the food got better and the entertainment became world class. And with the improved amenities, people who hadn’t visited Las Vegas became even more curious, and this brought in more people; the cycle was self-sustaining for decades.

Beat the Dealer was the genesis of what has become known as “Advantage Play” in casino gaming circles. It is defined to be the process of reverse engineering games that were designed to garnish money from the players and turn them into profit centers for players. And even though the players who can do this are rare, casino surveillance operators and the independent agencies who market game protection products and services to casinos are constantly pushing Advantage Players as a severe threat to a casinos’ bottom line. This couldn’t be any further from the truth, and it’s easy to see why these firms do this as they have a direct financial benefit from promoting these falsehoods.

After the publication of Beat the Dealer Thorp partnered with Noble Laureate Claude Shannon to develop what internet users have credited to be the first wearable computer, which was used to beat the casino game Roulette. Thorp and Shannon developed this seminal work while both were on faculty at the prestigious Massachusetts Institute of Technology.

Thorp’s original work in probability and statistical analysis paved the way for his equally ground-breaking work in the stock market. His original research in market analysis (published in his book Beat the Market) helped launch the derivatives market. Thorp used the assertions in Beat the Market to create the first market-neutral hedge fund in 1969; the results to date have been exceptional. Thorp released a public statement in the late 1990s where he stated his personal portfolio has had an annualised return of 20% averaged over 28.5 years.

An individual with such high personal achievement and of such substantial analytical ability is in a unique position to comment on the current standing of casino gaming. Gaming company executives would be wise to implement his assertions. This is a reasonable suggestion considering that Professor Thorp is one of the few people in any industry whose initial insights had altered the trajectory of revenue of an entire industry so drastically. I posed the following question to Professor Thorp. NC: The insights you presented in 1962 caused the casino gaming industry to change the rules of blackjack almost overnight. Since that time the evolution of the casino gaming industry has been dramatic, and has resulted in year-on-year losses for nearly a decade. What insights if any do you have for the casino industry that could jump start the move back towards the glory days of profitability?

When the casinos finally realised that blackjack could be beaten, they tried to stop the winners by barring them from play
Thorp responded: “When the casinos finally realised that blackjack could be beaten, they tried to stop the winners by barring them from play, changing the rules, or cheating. Despite this, the fact you could win made blackjack the most popular table game, eclipsing the previous champion, craps. As time passed, they harassed suspected counters, reduced the number of tables with decent blackjack rules, and introduced non-standard gimmicky table games of all sorts. They ended up with legions of lower income gamblers pulling handles on slot machines.”

Thorp’s answer goes to the heart of the problem that the gaming industry is experiencing. A standard concept taught in business schools is when you have an inferior product (slot machines and gimmicky table games) coupled with increasing competition, the result is that the same core products with ongoing rebranding are distributed. This is what’s going on in casinos today. IGT has several variations of the Wizard of Oz games, and Aristocrat has multiple versions of the Superman title. The functionality of these two series of games is similar to almost every other casino game on the gaming floor. The hope is that they attract players to the themes and not the functionality of the game. But when the novelty of playing on the familiar themed game dissipates, any initial revenue bump seen will rapidly flatten and then fall below the initial support levels.

Operators are spending excessive amounts of money on licensing the brand on top of the initial development and certification cost. Any initial revenue bump that may occur will be shifted towards paying licensing costs. Dorothy and Toto’s likeness is not cheap and neither is Clark Kent’s.

Most of the new slot games being developed are low denomination games, as Professor Thorp alluded to. Similarly, the low denomination carnival table games, specifically the 6:5 Blackjack, gives big advantages to the casino and this burns a player out fast. A person has to look no further than the triple zero roulette game seen at the Venetian Casino in Las Vegas. Apparently the 5.3% advantage isn’t enough for the Sands Corporation.

The 'turn and burn' philosophy that most casinos adhere to now is a result of the gaming industry no longer catering to people that gamble, but now focus on taking advantage of tourists and conventioneers. They squeeze every dollar they can from them, by having them pay for parking (MGM and soon Caesars) and by charging for drinks at the casino bar, despite a player playing the machines at the bar.

The insights of Ed Thorp were invaluable in 1962. The marketing value of his mathematical analysis has led to multi-billion dollar resorts and decades of overwhelming profits. It’s arguably one the most impactful profit-generating insights in any industry, and certainly in casino gaming. It would serve the casino gaming industry well to adhere to his most current insights, and in doing so the casino gaming industry may save itself, from itself.
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