Casino Mathematics

(How Casinos Make Money)

• Probabilities
• Law of Large Numbers
• Expected Value / House Advantage
• Standard Deviation
• Confidence Limits
• The Normal Curve
• Game Volatility / Volatility Index
• Table Win/Loss Probabilities
• SM Jackpot Probabilities
• Exit Strategies
• Gambler’s Ruin
• Rebates and Discounts (Marketing)
A casino is a mathematics palace
set up to separate players from
their money. Every bet made in a
casino has been calibrated within a
fraction of its life to maximize profit
while still giving the players the
illusion that they have a chance.

Nicholas Pillegi,
Casino (1995)
 ADVANCES IN CASINO GAMING
Table Game Slot Machine

Player Rating Systems Slot Tracking

Dynamic Reporting Systems Virtual Reels
Chipper Champs Tokenization
Winning Result Displays Multi-line
Games
CS, LIR and Super Bucks Jackpots Feature Games
E.S.S. Mystery Jackpots
“Madness 21” – Interactivity Jackpots
Automatic Shufflers Bonusing
Messaging
Auto-paging
Note Acceptors
 Comparative Experiences and “Value” Derived
Table Game Player Slot Player
Product Gaming entertainment Gaming entertainment
Cost $90 over 2 hours (e.g.) $90 over 2 hours (e.g.)
Benefits $3 in points $9 in points
$4 - $8 bounce back
$5 snack voucher
May double or treble stake May experience significant win
(in credits)
Chance to win jackpots including
cars
Involvement in sporadic Involvement in regular EGM
promotions often not limited promotions limited to members
to members
Total Benefits $3 and limited $20 and extensive

Other benefits associated with Slot play include ease of play, low limits, low bankroll, automatic
recognition and experience that even when you lose you have grown your point balance.
Probability is the very guide of life.
Cicero (106-
48BC)

Probability is like a wave. Because

of the house advantage, over time
the player dips lower and lower
until he stops crossing the mid-
point and ultimately loses all his
money, unless he quits first.
Jeff Marcum in Temples of
Chance, (1992)
Basic Probability Rules:

3. The probability of an event will always be between 0 and 1.

5. The probability of an event occurring plus the probability of an event

not occurring equals I. (Complement Rule)

8. For mutually exclusive events, the probability of at least one of these

events occurring equals the sum of their individual probabilities.
(Addition Rule)

4.a. For independent events, the probability of all of them occurring

equals the product of their individual probabilities. (Multiplication
Rule – dependent events)

4.b. For non-independent events, the probability of all of them occurring

equals the product of their conditional probabilities, where the
conditional probability of one event is affected by the event(s) that
came before it. (Multiplication Rule – dependent events)
 How Do Casinos Make Money?
Retailer:
Revenue = Quantity x Price
Casino:
1. Theoretical Win = Handle x House
Advantage
where:
Handle = Ave. Bet x Hands per Hour x Hours Played
or
Handle = Ave. Bet x No. of Hands Played

2. Actual Win = End. Capital + Cash Sales + Excess

Chips + Chip Yield – Table Refill – Beg. Capital
How Do Casinos Make Money?

FLOW OF CHIPS EXPECTED WIN

DEAL PLAYER BANK CUSTOMERS HOUSE Handle X H.A.
1 1,000 1,000 2,000 25.4
2 1,000 1,000 1,950 50 25.4
3 1,000 1,000 2,000 25.4
4 1,000 1,000 1,950 50 25.4
5 1,000 1,000 2,000 25.4
6 1,000 1,000 1,950 50 25.4
7 1,000 1,000 2,000 25.4
8 1,000 1,000 1,950 50 25.4
9 1,000 1,000 2,000 25.4
10 1,000 1,000 1,950 50 25.4
250 250

Assumption: Baccarat H.A. = 1.27% (excluding ties)

 ADELAIDE CASINO
System Standards
Decision House
Game Location Rate
Advantage
BJ CGA 63 1.30 %
BJ IR 76 1.30
AR CGA 36 2.70
AR IR 33 2.70
MB CGA 58 1.26
MB IR 53 1.26
BA IR 41 1.26
TWO UP CGA 45 3.13
CRAPS CGA 50 1.50
BIG WHEEL CGA 42 7.69
B&S CGA 46 2.78
KENO CGA 1 23.00
Comp value = comp % x (theoretical win – tax – staff cost)
Comp % = 50% standard
Theoretical win = ave. bet x hands/hour x time played x edge
Tax % = 20%
Staff cost = $10 / hour of recorded play
 Law of Large Numbers
FAIR COIN PROBABILITIES
HEAD = 50% TAIL = 50%
No. of No. of Percent Deviation - Deviation -
Tosses Heads Heads No. of Heads Percent Heads

100 55 0.550 5 0.050

1,000 525 0.525 25 0.025

10,000 5,100 0.510 100 0.010

100,000 50,500 0.505 500 0.005

1,000,000 501,000 0.501 1,000 0.001

 CF-Bacolod
Baccarat Win Rate (Theoretical vs. Actual)
January to December, 2005

Theoretical Actual Total Cumulative Win Rates

Month Win Win Bets Theoretical Actual
Jan 988,131 3,886,299 85,924,400 0.011500 0.045229
Feb 609,621 1,325,950 53,010,483 0.011500 0.037516
Mar 672,802 1,601,550 58,504,515 0.011500 0.034511
Apr 1,317,763 1,810,200 114,588,067 0.011500 0.027639
May 1,116,195 2,452,000 97,060,412 0.011500 0.027075
Jun 1,758,309 2,677,100 152,896,417 0.011500 0.024472
Jul 3,261,150 4,678,600 283,578,245 0.011500 0.021798
Aug 1,166,140 2,067,000 101,403,467 0.011500 0.021647
Sep 1,270,092 876,500 110,442,778 0.011500 0.020215
Oct 1,389,633 (190,700) 120,837,683 0.011500 0.017980
Nov 1,571,716 5,173,900 136,670,943 0.011500 0.020046
Dec 1,264,212 2,119,250 109,931,492 0.011500 0.019986
Note: 9 tables
 Law of Large Numbers
Win Percent
25.00%

20.00%

15.00%
Upper Limit (95%)
10.00%

5.00%

0.00%
Theoretical Win
-5.00%

-10.00%

-15.00% Lower Limit (95%)

-20.00%
100 1,000 2,000 10,000 100,000

NO. OF DEALS

Assumption: P 1.00 bet per hand

 Law of Large Numbers
Win Amount

60

5%)
50 it (9
r Lim
Uppe

40
IN MILLION PESOS

n
tica l Wi
30
Theore

20

10 it (95%)
Low er Lim

(.20)
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000
NO. OF DEALS
Assumption: P1.00 bet per hand
Expected Value or House Advantage

Formulas:

EV = Σ (Net Payi x P)

where, Net Pay = net payoff

P = probability of net pay

EV
HA = X 100
wager
 DOUBLE ZERO ROULETTE

Type of Bet Probability True Odds Payoff Odds

1 Number 1/38 37 to 1 35 to 1
2 Numbers 2/38 36 to 2 17 to 1
3 Numbers 3/38 35 to 3 11 to 1
4 Numbers 4/38 34 to 4 8 to 1
5 Numbers 5/38 33 to 5 6 to 1
6 Numbers 6/38 32 to 6 5 to 1
Dozens/Columns (12 Numbers) 12/38 26 to 12 2 to 1
Red/Black/Odd/Even/High/Low 18/38 20 to 18 1 to 1
(18 Numbers)
1 1

2
1

8
 BACCARAT
. Probabilities .
Including Draw Excluding Draw
BANKER 0.4585974 0.5068248
PLAYER 0.4462466 0.4931752
DRAW 0.0951560 –

SUPER 6
. Probabilities .
Including Draw Excluding Draw
BANKER 0.404518 0.447222
PLAYER 0.446123 0.493220
DRAW 0.095488 –
SUPER 6 0.053871 0.059558
Table Occupancy
and Productivity
 Definition of terms :
Table Occupancy – the ratio of the number
of playing customers to the total
number of table betting slots

Table Utilization – the ratio of the utilized

time of the table to the total
time the table is open
 Comparative Analysis
Casinos A & B
Assumptions:
2. Both casinos have 28
customers.
3. Casino
Table occupancy:
A - 28 tables at 1 customer per
table B - 4 tables at 7 customers per
Casino
table
3. Standard no. of deals per hour:
Casino A - 60
Casino B - 30
4. Table utilization for both casinos is 100%.
 Casino A (28) Casino B (4)
Bet per hand P 300 P 300
Hands per hour per table x 60 x 210
18,000 63,000
House Advantage x 1.15% x 1.15%
Win per hour per table 207 724.5
Hours per shift x 8 x 8
Win per shift per table 1,656 5,796
No. of tables x 28 x 4
Gross profit/win 46,368 23,184
Operating Expenses:
Salaries - Casino Shift Mgr. - -
Pit Managers (2:1) 3,524 1,762
Pit Supervisors (7:1) 9,317 1,331
Dealers (42:6) 42,840 6,120
Other OPEX-Opns. (20% GP) 9,274 4,637
Total Operating Expenses 64,955 13,850
Net Profit before taxes (18,587) 9,334

Contribution Margin 40.09% 40.26%

 Casino A (28) Casino B (4)
Bet per hand P 500 P 500
Hands per hour per table x 60 x 210
30,000 105,000
House Advantage x 1.15% x 1.15%
Win per hour per table 345 1,207.50
Hours per shift x 8 x 8
Win per shift per table 2,760 9,660
No. of tables x 28 x 4
Gross profit/win 77,280 38,640
Operating Expenses:
Salaries - Casino Shift Mgr. - -
Pit Managers (2:1) 3,524 1,762
Pit Supervisors (7:1) 9,317 1,331
Dealers (42:6) 42,840 6,120
Other OPEX-Opns. (20% GP) 15,456 7,728
Total Operating Expenses 71,137 16,941
Net Profit before taxes 6,143 21,699

Contribution Margin 7.95% 56.16%

 Casino A (28) Casino B (4)
Bet per hand P 1,000 P 1,000
Hands per hour per table x 60 x 210
60,000 210,000
House Advantage x 1.15% x 1.15%
Win per hour per table 690 2,415
Hours per shift x 8 x 8
Win per shift per table 5,520 19,320
No. of tables x 28 x 4
Gross profit/win 154,560 77,280
Operating Expenses:
Salaries - Casino Shift Mgr. - -
Pit Managers (2:1) 3,524 1,762
Pit Supervisors (7:1) 9,317 1,331
Dealers (42:6) 42,840 6,120
Other OPEX-Opns. (20% GP) 30,912 15,456
Total Operating Expenses 86,593 24,669
Net Profit before taxes 67,967 52,611

Contribution Margin 43.97% 68.08%

 CONFIDENCE LIMITS
and
WIN/(LOSS) PROBABILITIES
 VOLATILITY PRINCIPLE

1. About two-thirds of the time, the actual win will be one

standard deviation of the theoretical win. (68.26%)
2. About 95% of the time, the actual win will be two
standard deviations of the theoretical win. (95.44%)
3. The actual win will never be more than three standard
deviations from the theoretical win. (99.74%)
 .4999

.4987 The Normal Curve

.4772
.3413

-3.7 -3 -2 -1 0 +1 +2 +3 +3.7

.0012 .0215 .1359 .3413 .3413 .1359 .0215 .0012

.6826
.9544
.9974
.9998
 The Normal Curve
.0215 .1359 .3413 .3413 .1359 .0215

-3.7 -3 -2 -1 0 +1 +2 +3 +3.7

-3.88 M -2.40 M -910 T 575 T 2.06 M 3.55 M 5.03 M

Assumption: 1,000 hands at P50,000 per hand

 Confidence Limits
Win Percent
30%
25%
20%
15%
10%
5%
0%

-5%
-10%

-15%
-20%
-25%
-30%

100 1,000 1,500 3,000 7,500 50,000 100,000

NO. OF DEALS
 Confidence Limits
Win Amount

1,400,000
1,200,000
1,000,000

800,000
600,000

400,000
200,000
0
-200,000
-400,000

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000
NO. OF DEALS
 Standard Deviation

Formula:

Varwager= ∑ [(Net Payi – EV)2 x Pi]

SDwager= Varwager

where, EV = expected value

Net Pay = net payoff
P = probability of net pay
 3 Ways of Examining Fluctuations or Volatility

SDpu
Win Percent EVwin % = EVpu
SDwin % = ----------
√ n

Win Amount Evwin = unit wager x n x EVpu SDwin = unit wager x √ n x SDpu

Win Units EVunits = n x EVpu SDunits = √ n x SDpu

To determine Confidence Limits:

EV ± ( Z x SDwin )

where Z = standard normal value depending on the confidence level

 Actual Play at 95% Confidence Limit

15,000,000

10,000,000

5,000,000

0
1 2 3 4 5 6 7 8 9 1 11

-5,000,000

-10,000,000

-15,000,000
63 124 186 235 297 361 429 491 554 614

No. OF DEALS
Average Bet = P250,000
 Actual Play at 97% Confidence Limit

20,000,000

15,000,000

10,000,000

5,000,000

0
1 2 3 4 5 6 7 8 9 1 11

-5,000,000

-10,000,000

-15,000,000
63 124 186 235 297 361 429 491 554 614

No. OF DEALS
Average Bet = P250,000
Questions to ask if actual win falls outside normal
confidence levels:
2. Is the data correct?
3. Is there an extraordinary event that caused the
deviation?
3. Is there a mechanical or personnel error?
4. Are players cheating you?
5. Are your employees stealing from your casino?
Determining Win/(Loss) Probabilities
using as example a “Freeze-Out” Game

In February 1990, a Japanese whale won $6 M from the Trump Plaza in

Atlantic City and $19 M at the Diamond Beach Casino in Darwin,
Australia. Upon returning to the Trump Plaza in May, the casino accepted
the whale’s challenge to play Baccarat at $200,000 per hand on the
condition that he do so until he was either ahead $12 M or behind $12 M.
The game lasted 70 hours with a total of 5,600 hands dealt. Compute:

1. the probability that the casino will

a. lose > 12 M
b. win > 12 M
2. the probability that the casino will
a. lose > 24 M h. win 12 to 18 M
b. lose 24 to18 M i. win 18 to 24 M
c. lose 18 to12 M j. win 24 to 30 M
d. lose 12 to 6 M k. win 30 to 36 M
e. lose 6 to 0 M l. win 36 to 42 M
f. win 0 to 6 M m. win > 42 M
g. win 6 to 12 M
GAMBLER’S RUIN CONCEPT
This is the simple proposition that all
other things being equal, the gambler
with more money in a bust out game,
i.e., where play continues until you
win or lose all your money, is more
likely to prevail over the gambler with
less money. Of course, casinos not
only have more money than almost
all players, they also possess a house
advantage to assure that all things
are not equal…
Gambler’s Ruin Formula:
a
q 
1 −
p
P (success) =
 
n
q 
1 −
p
 
a n
q  q 

p −p
P (ruin) =
   
n
q 
1 −
p
 
Double or Nothing Formula:
a
p
P (doubling before ruin) = a a
p +q
a
q
P (ruin before doubling) = a a
p +q
 REBATES AND DISCOUNTS

1. Rebate on (Player’s) Theoretical Loss

Comp Value = average bet x
decisions per hour x hours played
x HA x comp rate

2. Dead Chip Program

R x Plose
Effective H.A. = H.A. −
(1 + R )
where:
H.A. = the normal house advantage
R = rebate percentage
Plose = probability of losing the wager
 REBATES AND DISCOUNTS

3. Rebate on Actual Loss

N x HA x LE
Equivalent Rebate =
( N x HA) + [UNLLI ( z ) x N x SD]
where:
N = number of hands
HA = house advantage
LE = theoretical loss equivalency
SD = wager standard deviation
z = (N x HA) / ( N x SD)
UNLLI (z) = unit normal linear loss integral for z
 PAYOUT DISTRIBUTIONS FOR 3 SLOT MACHINES
SLOT MACHINE 1 SLOT MACHINE 2 SLOT MACHINE 3
PAYOUT HITS PAYOUT HITS PAYOUT HITS
0 566966 0 879816 0 726817
2 296827 2 300 2 128924
5 20624 5 300 5 14256
10 50 10 300 10 9840
25 50 25 400 25 2400
40 50 40 400 40 800
50 40 50 500 50 500
100 30 100 800 100 320
150 25 150 600 150 240
180 20 200 400 200 180
200 15 300 400 250 240
300 12 500 300 300 100
400 10 1000 200 500 50
500 8 2000 10 750 32
1000 5 3000 6 1250 24
1200 3 5000 3 1500 12
100000 1 10000 1 2000 1
Cycle 884,736 Cycle 884,736 Cycle 884,736
Hits 317,770 Hits 4,920 Hits 157,919
Payback % 94.50% Payback % 94.84% Payback % 94.66%
Hit Freq. 35.92% Hit Freq. 0.56% Hit Freq. 17.85%
V.I. 175.57 V.I. 43.64 V.I. 21.04
 PAR SHEET SUMMARY DATA
Reel Strip Number 1A HOLD % 5.053

MODEL # : HYPO - A PAYTABLE XYZ - A

PERCENT
COIN # HIT FREQ TOTAL HITS TOTAL PAYS
PAYBACK
1 94.947% 36.80% 325,570 840,034

Reels: 3 Stops: 96 Reel Combos: 884,736

PAYOUT HITS
VOLATILITY INDEX = 10.990
0 559,166

2 295,827

5 28,256 90% CONFIDENCE VALUES

10 400 Handle Pulls Lower % Upper %

25 300 1,000 60.19 129.70

40 240 10,000 83.96 105.94

50 180 100,000 91.47 98.42

100 150 1,000,000 93.85 96.05

150 100 10,000,000 94.60 95.29

200 50

250 20

300 15
500 12

750 10

1,250 6
1,500 3

2,000 1
TOTAL 884,736