What is Gambling and How Does it Work?

by Michael Stevens
on May 14, 2018

I sometimes do a little editing on the Wikipedia, and a few days ago I saw someone make a . They objected to referring to poker as “gambling” because of the game’s skill element. Of course, that’s a demonstration of a lack of knowledge about the meaning of the word “gambling.”

Gambling means that you’re betting money on something where the outcome isn’t a foregone conclusion. Yes, poker is a game of skill, but the outcomes are far from certainties, regardless of how skilled you are. In the long run, yes, a skilled poker player should have an edge over unskilled players.

But in the short run, it’s still gambling.

It’s the wagering of money that makes an activity gambling. A gambling activity doesn’t get disqualified as gambling just because you can tilt the odds in your favor.

With that in mind, I thought I’d write a blog post that offers a broad overview of gambling in general. Since it’s a blog post, I can’t go into enormous detail, but you can find insights into specific subtopics of gambling elsewhere here.

This post should provide you with a fun look at the nature of this beast called gambling, though.

A Little Bit of Gambling History

I have a friend who insists that gambling is intrinsic to our nature as human beings. After all, every day you make decisions about things with uncertain outcomes. And there’s almost always a financial or economic consequence to those risks.

History seems to bear that out. Historians have evidence that humans were rolling dice 5000 years ago. They were playing dominoes and selling lottery tickets in China 1000 years ago. Playing cards are even a little bit older than that.

Even more recognizable forms of gambling are 100s of years old. Poker, in some form, is at least 300 or 400 years old. Roulette has been with us 1796. Craps, in an earlier form called “Hazard,” has been around since the Crusades. A game recognizable as blackjack is mentioned in Don Quixote, which was written prior to 1605.

Even casinos aren’t new—–was opened in Venice, Italy in 1768.

Some people might even consider the insurance industry a type of gambling, and insurance as we know it was also developed during the 17th century. When you buy insurance, you’re “betting” that something bad will happen. You’ll get a payoff when it does.

The insurance company is betting the other way. And since they’ve studied the math so closely (actuarial tables, don’t you know), they have a significant mathematical edge over the average customer. That’s how they profit.

But even when you take a job with a corporation, you’re taking a gamble. You’re betting that the compensation for the work you do will be fair and will last a certain amount of time before you have to find another job.

Gambling Laws and Regulations All Over the World

Any time you have something as popular and profitable as the gambling industry, the government is going to get involved in it.

Don’t believe me?

Think about the proliferation of the lottery in the United States over the last 50 years. I’m firmly convinced that the government has no business running a gambling business, but it’s not only accepted—it’s hugely popular.

In many jurisdictions throughout the world, gambling as a business is completely illegal. It’s a complicated situation, though, because most countries have multiple layers of laws. The United States is a good example. You have laws at the federal level which apply to the entire country, but you also have 50 states, each of which has its own laws related to gambling.

In a country like the United States, gambling can be completely legal and even encouraged in one state while being against the law in the state right next door. In Oklahoma, casinos are everywhere, but in Texas, you can’t even play poker unless it’s a home game.

In the state of Washington, internet gambling is a felony, which is a degree considerably worse than a misdemeanor.

Since gambling isn’t legal everywhere, destinations which offer legal and regulated gambling become popular tourist destinations. Look at Las Vegas as an example. It’s in the middle of a desert. Why would anyone want to go there?

The city founders figured out early on that if they allowed activities that were illegal elsewhere, they’d be able to attract visitors and even residents. Now Las Vegas is one of the biggest tourist destinations in the United States, if not the world.

Macau is an even better example. It’s a tiny, densely populated country that used to be a Portugal territory. Now it’s part of China, but they maintain a degree of autonomy—especially as it relates to their gambling industry. In fact, over the last couple of decades, Macau has become the biggest gambling destination in the world, eclipsing Las Vegas in terms of gambling revenue and casino action.

The details of the laws related to gambling vary by country, but the general trend throughout the world seems to be in the direction of legalization and regulation. In Switzerland, gambling was illegal until 1993. Gambling in Sweden is legal, but it’s also an activity that’s monopolized by the government. It’s illegal to run a private gambling business in Sweden.

My prediction is that gambling will continue to become more widespread throughout the world as a legal but regulated activity.

How People Gamble

Remember earlier how I suggested that everyone likes to gamble?

People will be on anything.

Think about people in prison who are willing to bet cigarettes or packets of ramen noodles on the outcome of cockroach races. When you’re bored, putting something of value on the line is a way to get the old synapses firing in the brain.

For the purposes of this post, though, I’m going to divide gambling into multiple categories, each of which I’ll explain in more detail in the sections below.

These are in no particular order:

Casino games are house-banked games in which the casino maintains a mathematical advantage over the player. This means that whoever is hosting the game covers all the players’ bets. Games like blackjack, craps, roulette, slots, and video poker are casino games.

Poker games are a family of card games where players compete with each other for money. The outcomes are determined by a standard rubric for valuing combinations of playing cards. This rubric is called the standard ranking of poker hands.

Sports betting refers to wagers placed on the outcome of any sporting event you can imagine. In the United States, betting on baseball, basketball, and football are hugely popular. In other countries, betting on whatever sport is popular there is common. You can bet on sports with other individuals or with companies which specialize in covering those bets. Such companies are called “sports books” or “books.”

Lotteries are games where gamblers bet on random number selections. The prize pools for these lotteries are generated from the sale of the lottery tickets. Over the last few decades, legal state-run lotteries have become the norm in the United States. Before that, lotteries were often offered as an underground criminal activity. They called it “running numbers.”

You have various ways of manipulating the odds and math behind most of these gambling activities. These means of manipulating the odds in your favor are called “gambling strategies,” and after I cover each broad activity in more detail, I’ll explain some of the more interesting gambling strategies that actually work. (I’ll also point out some strategies that are popular but ineffective.)

How Casino Games Work

All casino games are gambling games, but not all gambling games are casino games. What separates casino games from other gambling activities are 2 factors:

  1. The house covers all the bets.
  2. The house has a mathematical edge over the bettor.

It would be hard for an individual to raise enough capital to run a casino. Most of them are big businesses. The nature of that mathematical edge over the player is such that it kicks in over the long term. In the short run, even a large casino can lose money.

The most popular casino games in the United States are all games you’ve heard of. Here’s a quick rundown of each of those games. Keep in mind that this is far from a comprehensive list:

Blackjack is a card game where you compare your hand with the dealer’s hand. If you get closer to a score of 21 than the dealer does, without going over, you win. If the dealer does, then the house wins. The casino gets its edge in blackjack by making the player go first. If the player busts, he loses his bet, even though the dealer might bust when it’s her turn to act.

Craps is a dice game. It’s the only game in the casino where the player actually controls the mechanism for generating the results—one of the players rolls the dice during a round of craps. The basics are simple. You can bet on the shooter to succeed or fail at rolling a 7 or an 11 on the come-out roll or rollin “the point” during a subsequent roll. If the shooter rolls a 2, 3, or 12 on the come-out roll, or a 7 on a subsequent roll, he fails.

Roulette is a spinning wheel game. The roulette wheel is horizontal and has 37 or 38 pockets. 18 of those pockets are red, 18 are black, and 1 or 2 are green (depending on which version of the game you play). The pockets are also numbered from 0 through 38. You can bet on any number of results—odd or even, black or red, specific numbers, etc. Each bet results in a payoff based on how likely it is that you’ll win.

Slot machines are mechanical or computerized games with spinning reels that have symbols on each reel. Specific combinations of symbols trigger payouts. These are the most popular games in modern American casinos, but they’re also the biggest drain on a gambler’s bankroll.

Video poker is a kind of hybrid between slot machines and poker. Instead of reels with symbols, video poker games have playing card symbols. The probability of getting these cards is the same as that of a deck of cards, and payouts are determined by the pay table. Poker hand rankings are used to determine which hands pay out the most.

You can find any number of additional casino games that are similar to the above games or variations of the above games. In the last couple of decades, house-banked versions of poker have become popular in casinos. The number of slot machine and video poker variations is staggering.

All casino games have one thing in common—a house edge. This is a percentage of each bet that the casino expects to win on average over the long run. For example, if a casino game has a house edge of 1%, the casino expects to win $1 for every $100 you wager on that game.

Understanding the house edge requires an understanding of the difference between the short term and the long run. One bet or a couple of bets is a short term result. It’s impossible to see the house edge “come true” in the short term. But over thousands of bets, the average starts to resemble this long-term mathematical expectation.

Take blackjack, for example. The house edge is 1%, but it’s impossible to lose $1 on a single $100 blackjack bet. You’ll lose $100, win $100, or win $150 (if you get a blackjack, which pays 3 to 2 at most casinos). But over 10,000 bets, if you average your net loss by the number of bets you made, you’ll come close to seeing that 1% edge become reality.

How Poker Works

I mentioned that poker has become a popular casino game, but traditional poker is when players compete for each other’s money. The dealer just facilitates the action. In fact, in home games, the players act as the dealer on a rotating basis.

The most popular poker games being played today include the following:

Texas holdem is the most popular poker game in the United States. Players get 2 cards face down (their “hole cards”) then share 5 cards as community cards. During a showdown, the player who creates the best 5-card hand using any combination of hole cards and community cards wins the money in the pot.

Omaha is similar to Texas holdem, but players get 4 hole cards instead of 2. They must use 2 hole cards and 3 community cards instead of being able to use any combination of cards. Omaha is often played “high low 8 or better,” which means that the player with the best qualifying low hand splits the pot with the player with the best poker hand.

Stud is an older game that requires more memory and less luck than Texas holdem or Omaha. It’s usually played with 7 cards per player now, but it’s also popular in a 5-card version. In stud poker, each player gets his own cards, some of which are face-up and others of which are face-down. Like Omaha, 7 card stud is often played in high-low format.

There are a wide variety of additional poker games available in casinos, and the array of home variations is staggering.

When poker is hosted by a casino, the property takes 5% of each pot to pay for hosting the game. To break even at poker, players must play well enough to win more than they “should.” That’s because they need to make up for 5% of each pot going to the casino. This 5% is called “the rake.”

How Sports Betting Works

Anyone can place a wager on a sports event with a buddy. But that’s not how most sports bets are placed. Most sports bettors, especially those who are serious about it, place bets with a “sports book” or “book.”

In the United States, running a bookmaking operation is illegal. But the law is rarely enforced, especially when you’re talking about small-time local bookies. Become a regular at any local neighborhood bar, and you can ask for referrals and find someone who will take your action.

As with poker and casino games, though, you’re betting with a mathematical disadvantage. Books usually require you to wager $110 to win $100. They also handicap most games to make your odds of winning roughly 50%.

You could read entire books about sports betting and still not have a complete understanding of the subject.

How Lotteries Work

Most people already have a rough understanding of how the lottery works. You buy a ticket and pick 3, 5, 6, or 7 numbers. There’s a random drawing, and if enough of your numbers “hit,” you win money.

The prize money for the lottery comes directly from the purchase of the tickets, but whoever is administering the lottery keeps a percentage. This means that you’re again operating at a mathematical disadvantage to the game.

In the case of the lottery, the payback percentage—the amount you can expect to win back on your average bet—is only about 50%. This makes the lottery one of the worst bets you can place.

Lotteries used to be run by organized crime figures. That’s what the expression “running numbers” means. They ran fair games, and my guess is that their payback percentage was comparable to or better than the payback percentage for the state-run lottery.

I’m not a fan of state-run lotteries. I think the house edge is too high.

Gambling Strategies that Work

A gambling strategy that works is one in which you can get a mathematical edge over the other party in a bet. In some casino games, it’s possible to get an edge.

But with most casino games, it’s impossible to overcome the house edge.

You can count cards in blackjack and get an edge over the casino, but the casinos don’t like it. You can also find the best pay tables at video poker and play with perfect strategy. This will net you a small edge, which can be fun. But you can’t make much of a living playing video poker. The edge is too small, and the machines which have the best pay tables are the lowest stakes machines.

If you can play poker at an expert level, you can earn a living from that game. But you need to be significantly more skilled than the average player to overcome the rake.

Some sports bettors make a living betting on sports. They’re so good at handicapping that they can take advantage of mistakes on the part of the bookmaker. They also understand the math well enough to find arbitrage opportunities that guarantee a tiny profit regardless of how a sporting event turns out.

Problem Gambling

Gambling causes measurable changes in brain chemistry, just like alcohol and drugs. And as with alcohol and drugs, gambling can become addictive. This is generally referred to as “problem gambling.”

I have a friend who’s been a sober member of Alcoholics Anonymous for over 41 years. He told me that in the early days of AA, almost every member had a gambling problem in addition to their drinking problem.

If you think you have a gambling problem, I encourage you to get help before you wreck your finances and ruin your life. Those chemicals in your brain are more powerful than you think.

Conclusion

Gambling is ubiquitous to our experience as human beings, but there’s gambling… and then there’s gambling.

If you want to take up gambling as a hobby or as a profession, you owe it to yourself to get an education on the subject. This post only provides the shallowest of introductions.

Do some more reading and studying before launching your own gambling hobby.

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