Whenever you walk into a casino, be it a land-based or an online one, one thing has to be clear for you: the expected value you’re facing is a negative one. In order to understand what this is about, first, you need to grasp the concept of mathematical expectation, also known as expected value or EV.
The best way to illustrate the EV at work is an example. Let’s say you and I both bet $1 on a coin-flip. The likely outcome of a coin-flip is 50-50, which means, on average I’ll win once every two flips. Again, the word to focus on here is ‘on average’, because it can well happen that I lose or win 10 flips in a row, but after a very large number of flips, if you add things up, the result will be a 50-50 distribution of wins, so basically none of us shall win anything. Therefore, the expected value on an even bet on a coin-flip is zero.
Now then, let’s say we agree that I bet $1 against your $2 on the coin flip every time. This changes the whole situation. Because I win once in every two bets, that means I lose $1 on the first one and win $2 on the second one. That is a clear profit of $1 after every couple of bets. Divide that by the number of bets (2) and you get the mathematical expectation/every single bet we play, which is +0.5 for me and -0.5 for you. Now all I have to do is make sure that we play as many bets/hour as possible, in order to maximize my hourly rate.
This is exactly the kind of treatment you get in a casino. You play with negative EV, albeit the negative EV will be much smaller for you in most casino games. This brings us to the house edge. If I were the house in the above example, the house edge would be 25%, because, on every $2 bet that you made, you’d get $1.5 back. If the house advertises a 1% house edge on blackjack, you’ll know that you’ll get 99 cents back on every $1 bet that you make.
Why do people play in casinos at all if they know they’re going to lose? – you may ask. There’s a thing called variance that keeps gamblers on the edge of their seats. You see, even though you know you’re going to lose X amount of dollars on the roulette, with every spin you get the chance to bring the house down. On top of that, variance says there’s nothing to prevent you from stringing together some quite incredible winning streaks, so variance does indeed induce a huge luck element into the game. That is what compulsive gamblers crave, and that is the driving force behind the whole industry.
Now that you know what the house edge is, let’s take a look at the payout rate. If you walk into a casino you’ll probably see that the payout rate is displayed on slot and video poker machines. In the case of these games, the payout rate is usually somewhere between 95-98%. The payout rate is the opposite of the house edge. The house cannot tape it onto a slot machine that ‘we’ll take 2 cents of every dollar you play here’, instead it’ll say ‘we give you 98 cents back on every dollar you play’. That’s the payout rate.
Another concept you have to be familiar with is the house drop. You’ve probably heard, that on blackjack, for instance, the house edge is a mere 1%, the house drop, however, can be as big as 15%. The 15% profit is what the house really counts on for revenue, as most of their players will play with a less than optimal strategy, they’ll go on tilt, they’ll spend too much time at the table, etc.