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08/06/2006

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Matt Rognlie

A result mentioned in Posner's post intrigued me:

"A 2000 study by the economists John Barron, Michael Staten, and Stephanie Wilshusen estimated that an abolition of casino gambling would reduce personal bankruptcies by 1.4 percent nationwide and by 8 percent in counties in which or near which casinos were located."

Let's assume, for the sake of argument, that this result is approximately correct. If so, it would seem to imply that casinos, despite the wide existence of state lotteries, dramatically increase the frequency of destructive gambling. The only alternative is that casinos induce people predisposed to problem gambling to move nearby. While this may happen to some extent, I doubt that it can explain the enormous difference suggested by that statistic.

If so, we are talking about a very significant welfare cost to out-of-control gamblers, who are apparently hurt by casinos far more than lotteries. Is it possible that this welfare cost may outweigh both the costs of enforcement -- direct and indirect -- and the cost of denying responsible gamblers an efficient means of entertainment?

I'm not sure, but I think we may have to treat it as a possibility. Laws against gambling, at the moment, don't appear to have the same societally destructive consequences as the War on Drugs. This is probably thanks to government's reluctance to widely enforce them: who wants to break up a fun poker game among friends? But if the statistic about casinos is to be believed, this inconsistency in enforcement can have a rational public-interest motivation: impersonal casinos simply cause far more damage than ordinary social gambling.

On the flip side, having laws that we do not intend to completely enforce is always legally (and constitutionally) questionable. My socially liberal impulses tell me that a law regulating gambling is an unwarranted instance of moralist intervention in citizens' private lives. Still, I can't escape the possibility that it may have a net public welfare benefit.

Jason

One important point that is often missing from the debate is the distinction between different types of gambling.

Both online and brick-and-mortar offer two types of gambling games: games of chance vs. games of skill.

Games of chance (e.g. slot machines, roulette, craps) are played against the house and structured so they inherently favor the house. It is impossible to make money in these games in the long run. These are the games that are analogous to state-sponsored or state-permitted gambling, like the lottery or horse racing.

Games of skill (mainly poker) are played against other bettors. The house makes money by charging an hourly fee to play or by taking a "rake": a small percentage of each pot. But the deciding factor, in the long run, of whether a player wins or loses money, is skill. In the short term, luck is the main factor, but the only way to be a consistent winner is to have a skill advantage over your opponents, usually derived from hundreds of hours of study and experience.

My point is that poker, as a game of skill with an element of luck, is in a gray but distinct area between slot machines and chess, for example. It should be considered separately in the debate on online gambling because the element of skill required to be successful in it is arguably great enough to justify poker playing be considered a profession and treated as such (in fact, the IRS allows people to declare themselves as professional poker players).

If so, there are two questions that need to be answered: should people be allowed to gamble unfettered for pleasure, and should people be allowed to purse professions that are highly volatile due to the short-term effects of luck?

Platon

I disagree with calling gambling a "victimless" crime: it has victims.

Fraud schemes, too, very often involve financial contributions that are essentially voluntary - Pinoccio, for instance, agreed to "plant" his gold coins in the ground, foolishly believing that a money tree would grow there overnight. Despite the "voluntary" nature of doing that, Pinoccio was a clear victim - he lacked the knowledge that "money trees" don't exist.

In economic terms, his calculation of expected utility was based on completely unrealistic assesments. Same applies to gambling. You gamble if your expected utility is positive. Why is it positive? Because you expect the payoff, multiplied by the chance of winning, to be positive.

Let's not consider things such as "satisfaction from the process of gambling". Were shareholders grateful to Enron for feeding them false, but pleasant information? You derive satisfaction not from throwing a dice, or pressing a flashy button (you can do it at home), but from thinking you can, and will win money. As simple as that. People lack knowledge (just as Pinoccio) about real probabilites and real payoffs to calculate the real expected utility. Living in a world of illusions is one thing, but living in a world of illusions and realizing that it really is a world of illusions is an entirely different thing. Gamblers are victims of small knowledge.

ryang

Lotteries do not expose compulsive gamblers to similar problems as casinos because of their infrequent nature. Scratch-off tickets are far more similar to the type of thrill casino gambling provides.

For example, the marginal value of a second lottery ticket is very low. There is still only one drawing, and thus only one period of "thrill-seeking". The marginal value of pulling the slot machine again is relevant, as an entire new game is played, with a second thrill attached.

The reason internet gambling is so problematic is due to the relative ease at which an individual can lose large sums of money. Credit cards and wire transfers depersonalize the money. It may take a compulsive gambler years to bankrupt themselves at a casino, but only weeks online.

Thomas Bishop

I thought that this was an interesting comment:

“You gamble if your expected utility is positive. Why is it positive? Because you expect the payoff, multiplied by the chance of winning, to be positive…People lack knowledge…about real probabilities and real payoffs to calculate the real expected utility.…Gamblers are victims of small knowledge.”


We could make an analogy to smoking, drinking or another risky behavior:

“You [smoke] if your expected utility is positive. Why is it positive? Because you expect the payoff, multiplied by the chance of [contracting disease or dying], to be positive…People lack knowledge…about real probabilities and real payoffs to calculate the real expected utility.…[Smokers] are victims of small knowledge.”


So that people can make informed choices about risks, should state governments require casinos to posts odds of winning? It is my understanding that lottery tickets already post the odds of winning on the back (but I don’t know for sure because I have never bought a ticket).


Would this new information, if in fact it is new, substantially change behavior? For some people, it might—just as making available information about the risks of smoking may change behavior. But I wonder how large such a change would be. Smoking rates have declined in the US over the last 50 years, presumably because people have become more aware of the risks of smoking, but I recall that there has not been much of a decline, if any, in the last 10 years.

Kelly Smith

I found the discussion on gambling interesting. One of Becker's reasons for opposing government regulation of online gambling was the degree to which it is addictive, and that got me thinking about legal/economic implications of addictions on society. He implied that if gambling were more addictive, he would support an attempt to ban online gambling. Are the arguments against certain behaviors on the basis of their addictive nature founded on economics, or is it more of a "moral philosophy" thing?

Nelson

Whatever happened to personal freedom? Why would we want to live in a country that won't let us gamble? I mean is it really our money?

If this regulation is a good thing, then maybe we should pass more laws restricting the spending of our money on any activity that isn't considered productive and for the good of society. Why stop there? Why not prohibit the spending of any money that doesn't go to the greatest good of society? And since our legislature knows what this greatest good is, why even bother with money? We can have all of our activities directed by our benevolent government without even having to bother with loose change.

Tom Stone

First, let me thank "Jason" for his very important comment that distinguishes "games" of luck and games of skill. Much of the push to further legislate (outlaw) online gambling is the explosive growth of Online Poker. Anyone who doesn't know this apparently doesn't own a television set (or at least doesn't watch cable/satellite TV). Poker is hugely popular, and growing every year. And with good reason -- it is a very fun *game of skill*... to watch, to learn, to play. This is a critical distinction that the ignorant lawmakers seem to know nothing about, or worse, willfully evade.

In addition, I'd like to comment on this from Becker's post: "Online gambling is fast becoming a major threat to government revenue from gambling, and to its control over how and where gambling takes place."

If that is true, then why don't they legalize it, regulate it, tax it, and earn revenue from it? It is a large and growing industry -- and believe me, would be *much* larger already if it were clearly legal in the US, instead of in legal limbo. There would be *many* more people playing already if it were lifted from the perceived legal "gray area".

The reason, I will speculate, is that legislators are trying to impose their often-religiously-formed morals onto people, in all areas, including victimless crimes (including even games of skill like Poker). If it had to do with money, they would regulate and tax it. They prefer to make it unambiguously illegal, so it must be something else. Conservative-morality control over our social lives is the most likely driving force.

Btw, I agree with you that ideally it would be legal and not taxed/regulated. However, if that is not a realistic option, then I agree with the PPA and support legalizing, regulating, and taxing, to allow fans of the wonderful game of poker to continue to play online where it is safe and convenient.

Garrett

What about the position in which states that run lotteries find themselves? They want to maximize revenue, so they advertise the lottery, illustrating the possible benefits of such an "investment" in very positive terms (though I am not sure if some states do not allow such advertising of their own lotteries). They are therefore promoting the worst kind of money-management practices, and selling empty fantasies and dreams to their own constituents, many of whom are indigent and/or unsophisticated. Even worse than just relying on the unfounded fantasies of stupid people, they are actually trying to increase the number of stupid people in the state.

Does this make anyone but me uncomfortable?

Garrett

What about the position in which states that run lotteries find themselves? They want to maximize revenue, so they advertise the lottery, illustrating the possible benefits of such an "investment" in very positive terms (though I am not sure if some states do not allow such advertising of their own lotteries). They are therefore promoting the worst kind of money-management practices, and selling empty fantasies and dreams to their own constituents, many of whom are indigent and/or unsophisticated. Even worse than just relying on the unfounded fantasies of stupid people, they are actually trying to increase the number of stupid people in the state.

Does this make anyone but me uncomfortable?

Garrett

Er, on the subject of stupid people...sorry about the double post.

Merlin Beake

I do feel some of the later commenters are missing the point. I do not gamble myself except socially (e.g. as part of a work lottery syndicate) or when I think I can make money (e.g. against poker players who are much worse than me). I have a great deal of faith in mathematics and cannot see the point in losing money. However, other people seem to genuinely get pleasure from gambling, and I am not convinced it is only because they don't know the odds. They just enjoy it. Similarly, I enjoy drinking more than I know to be medically good for me. I have an extremely detailed knowledge of the longterm consequences of drinking more than is good for me, it is not a 'small knowledge' problem. If I, with full knowledge, choose to reduce my lifespan by a couple of years but enjoy myself, I do not see why someone should take that choice away from me, even if a small minority of people become ill as a result (become alcoholics). Similarly, I do not see why a small minority of people becoming compulsive gamblers should stop all other people from being allowed to gamble.

By all means tax, educate and regulate, but prohibition of relatively harmless past-times is a very blunt tool which criminalises millions of otherwise law-abiding citizens, as has been shown countless times.

Sean Bennett

It may be that there are additional utilities individuals derive from gambling beyond what Becker mentions: what I will call the "loser utility" and the "perceived winner utility."

It can be advantageous to an individual to be perceived by others as a 'good loser.' The socially persuasive heuristic of being "liked" for the harmless vice of lottery tickets or slots may supercede in value any loss of income produced by the gambling action. Indeed, much casino gambling is done in the presence of others, many discuss the lottery value with others, and this communal aspect of much of gambling is something that provides ripe opportunities for someone to show enough vulnerability to be liked by their acquaintences, resulting in potentially greater pay outs from these individuals in real times of need. In online situations, people still make "online" companions and may be benefiting from the "good loser" utility by practicing in a chat setting even without the face-to-face interaction.

On the flip side, there is a "perceived winner utility" as well. The cognitive bias to remember the outlier situations -- such as the $300 lottery ticket win, may cause a positive mental state that endured and is remembered beyond what would normally cost $300 to achieve. Even if the individual gambled $3000 to achieve the $300 win, the utility of the positive mental state from the incorrect idea that "I spent $1 to make $300" may be worth $5000 or $10000 or $1000000 in health and satisfaction to the right individual. It may be that even though the individual gambles online, they may benefit from this "perceived winner mentality" offline -- both in their own self-confidence and the health benefits that may provide, but also in attracting the companionship of individuals who seek out the hope a "win story" provides.

These two additional utilities, beyond the utility of the aspect of the thrill of risk Becker mentions, help to provide a more complete picture of the net utility an individual faces by engaging in an action with determinate or indeterminate risk. In conbination, these factors may help to explain better why individuals make the decisions to gamble, and why individuals choose to gamble online beyond the convenience factor.

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Huang Lechuan

I think what Merlin says is that people (sometimes) are willing to make tradeoff between life span and smoking pleasure, or between bankruptcy and gambling, and Sean goes on to provide an explanation for such uneconomical tradeoffs.
I agree with both of you, and it surely helps to examine utilities in detail. But if we explore utility deep enough we will find rationality (which happens to be the fundation of economics) becomes a joke, and in maximizing utility we could give up rationality all together. (However I am not so sure about where the balance is; it may help to define the domain of rationality in the first place...)
We now come back to the problem that gambling is "victimless". The rationale would go that laws should stay away as long as one enjoys what most people might perceive as a self-destructive hobby without affecting others. If this rationale holds, there is really nothing to be talked about. However, as some people do get addictive and compulsory, thus their choices irrational, we do have victims; this is where laws should come in.

Peter

"I favor allowing online gambling, given the weak arguments against it, the common human desire to gamble, and also that addictive aspects of gambling are greatly exaggerated. Indeed, I also believe it should remain tax free, along with purchases of other services through the Internet. For tax-free online gambling would put pressure on governments to reduce taxes and various restrictions on lotteries and other forms of gambling. Lower taxes and fewer regulations would give individuals cheaper access to ways to satisfy the mainly harmless desire to play games for money, and to bet on sporting and other events, including lotteries."

Brilliant argument, I totally agree.

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