Internet Gambling--Posner

An article in the New York Times of July 25 describes the efforts of the federal government to prevent Americans from gambling online in Internet casinos located outside the United States. The article reports that 8 million Americans engage in Internet gambling, spending a total of $6 billion a year. Gambling outside specific, authorized venues, such as Nevada (the state that has the fewest restrictions on gambling), Indian casinos, riverboat casinos, parimutuel betting at racetracks, and state lotteries, is illegal. Illegal gambling is a standard example of a radically underenforced, "victimless" crime ("victimless" in the sense of being a voluntary transaction, as distinct from a coerced transaction such as theft. The gambling laws are underenforced largely because gambling is victimless, which makes detection difficult and also reduces the public’s willingness to devote resources to preventing it. The argument for criminalization is that gambling is an unproductive and often an addictive activity that, by virtue of its addictive character, drives the gambling addicts to bankruptcy. In fact gambling is productive in an economic sense because it increases the expected utility of the gamblers; otherwise there wouldn't be gambling. It is as productive as any other leisure-time activity that does not involve the acquisition of useful skills or knowledge. Granted, the attraction of gambling is a little mysterious from a rational-choice perspective. Because of the need of the casino or other gambling establishment to cover its costs, the gambles that are offered are bad in the sense that the net expected monetary payoff is negative. The state lotteries derive significant revenues (an average of 2.3 percent in the 40 states that have state lotteries) from the sale of lottery tickets precisely by offering particularly bad odds: on average, of every $1 dollar in revenue from the sale of lottery tickets, only 50¢ is paid out in winnings. So only risk preferrers should derive net expected utility from gambling. Yet most gamblers probably have health, homeowners', and other forms of insurance and thus demonstrate risk aversion. For just as only a risk preferrer will accept bad gambles, so only a risk averter would buy insurance, since the insurance company’s loading fee makes the net expected monetary payoff from insurance negative. Some people believe irrationally that they are inherently "lucky," not realizing that "luck" is something observed ex post; no one has an asset called "luck" that enables him to beat the odds. Other people are so desperate or miserable that their marginal utility of money is very low, which truncates the downside risk of a gamble. Suppose, to take an extreme case, that you have only $1 left in the world. There isn't much you can do with $1, so, even if if you were risk averse, your most sensible move might be to buy a lottery ticket, on the theory that it is really costless. (Thus, welfare programs encourage gambling by reducing the cost of gambling away one’s financial resources.) The principle that this example illustrates is that if marginal utility is increasing in income, the benefit of winning a bet and thus increasing one’s income will confer more utility than an equal loss will confer disutility. And finally, there is an inherent human fascination with uncertainty and randomness, and these features of our environment and experience can be observed with particular clarity in gambling. In this respect, gambling is a consumption good rather than an investment good. It is true that some people become addicted to gambling and go broke. 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 casionos were located. However, given the enormous number of people who gamble, the percentage who go broke as a consequence of their gambling must be very small. This raises a serious question whether the harmless activity of a vast number of people should be curtailed to protect the small fraction who become addicted to it and as a result engage in self-destructive behavior. If gambling addiction is considered a genuine mental disorder rather than a preference, it perhaps could be controlled by "suitability rules" (a weak "perhaps"—the costs of enforcement might well be prohibitive) that would limit the percentage of a person's income or assets that he could spend on gambling. This would be a counterpart to the suitability rules that forbid securities brokers to buy highly risky securities for people for whom such investments are "unsuitable" by virtue of their financial situation. Addiction to gambling is more costly the more difficult it is to declare bankruptcy and thus wipe out one's debts. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did just that: made it more difficult to declare nonbusiness bankruptcies. It will be interesting to see whether the Act reduces the amount of gambling and gambling-related bankruptcies. The addiction argument is pressed in the legislative arena by the casinos and the other legal gambling establishments in support of restricting other gambling. The establishments argue that they try to prevent their customers from bankrupting themselves. But as far as I know, this is true only in the sense that they make sure that their customers can pay their losses. Internet gambling poses a strong competitive threat to the conventional legal gambling establishments, including state lotteries. Those establishments have high overhead expenses--large staffs, expensive equipment (one-arm bandits, casino buildings, casino boats)--with the exception of the state lotteries, but the states, as I have noted, depend upon them as a revenue source, in lieu of taxes, which are unpopular. (The purchase of a state lottery ticket is a voluntary tax payment of one half the ticket price.) Moreover, except for the lotteries, legal gambling imposes substantial time costs on the gamblers, who have to travel to the casino or the racetrack to place a bet. It is because of the overhead expenses and the states' revenue hunger that the odds offered the gambler are so bad (they are even worse, when the time cost of the gambler is added). There may also be monopoly rents further worsening the odds, since competition in the gambling industry is so restricted in most states, a factor in the recent Abramoff scandal involving efforts to prevent competition with Indian casinos. Internet gambling establishments have very low expenses, enabling them to offer an approximation to fair odds, and do not require any travel by the gambler. One would think fair odds an enormously attractive feature of Internet gambling to gamblers. At fair odds, which is to say with no loading expense (a gamblers' nirvana that Internet gambling, if allowed to operate without threat of criminal prosecution--which obviously drives up its costs--might approximate), the net utility of gambling soars because there is no longer a net expected financial loss. So the legal casinos are correct that they offer a measure of control over gambling: by offering only bad odds, they reduce the demand for their product. (The analogy is to the monopolistic provision of a product, which by reducing demand reduces the amount of pollution generated by the manufacture of the product.) It is doubtful, however, that this effect justifies the elaborate legal restrictions on the gambling industry.

Comments

[bill]

I think every now and then buying a lottery ticket comes very close to being a better than "fair" deal. Some multistate jackpots get up to almost 300 million every now and then, while the chance of winning is around 1 in 80 million. So, assuming you are the only one to pick the right number, and even after you pay half in taxes, paying one dollar for a ticket gives you an expected value of like 1.88. Of course it gets paid out over 20 years, but still, not bad odds for the pay out, and better than you are likely to find in any casino. Plus, your money goes to pay for education and other worthwile government projects.

[Brett Bellmore]

Speaking as somebody who occasionally buys lottery tickets, there may be a payoff to their purchase that you're not taking into account: Daydreams.

Between the time I buy a ticket, and the time it proves a dud, I'm able to have some pleasant dreams about what I'd do with the wealth if I won.

Those dreams, that the ticket enables, are typically worth a buck. Without the ticket I just don't have them. Despite the fact that I am rationally aware the chances of my winning are negligable, some part of my mind distinguishes between "negligable" and "zero".

I'm not buying a real chance of winning, I'm, literally, buying "the stuff of which dreams are made". And it's well worth a buck a dose.

[Bernard Yomtov]

I think every now and then buying a lottery ticket comes very close to being a better than "fair" deal. Some multistate jackpots get up to almost 300 million every now and then, while the chance of winning is around 1 in 80 million.

But when the jackpot gets that high the number of tickets sold goes way up, so the chance of there being only a single winner drops.

[Arun Khanna]

The enforcement of anti-offshore gambling laws relies on credit cards. These laws can be circumvanted by alternative ways of paying for online bets like digital currency or European credit cards issued to U.S. consumers.
U.S. should lobby for a 48 hour wait time for credit card company charges for overseas gambling bets. This way, barriers to gambling overseas will lead to gambling within the U.S. (where American rules and regulations can be enforced).

On a different note, fake overseas gambling bets can be used for terrorist financing. Therefore, we need laws that curb such collusive behavior between 'American' customers and their overseas 'relatives'.

[Lawrence Indyk, University of Kansas School of Law]

Are there other examples of a state using the law to set itself up as the official monopoly for all voluntary two-party commerce related around a product or an entire class of activity like is done with the lottery?

Law enforcement might seem so - but security guards and private arbitration are allowed to exist and profit so long as both sides are willing. There is public and private education, and so on. Even the operation of prisons is contracted out - and one wonders if one day they'll find a way to outsource that too, I would imagine it would be cheaper to fly a lifer to somewhere in the third world and keep him there for a decade or more than to do it in the US. He could communicate with his attorney and loved ones free via Skype.

If the government makes a product illegal - such as heroin - then it doesn't typically turn around and say "And the state is now the sole legitimate vendor of heroin available at your local gas station, cash purchase only please!"

So, is there anything else like the lottery - for which there could be feasible free-market competition, but for which the state creates for itself a profitable monopoly?

And is there any legal argument a potential internet gambling host could make, something like equal protection, to say that the state monopoly, or the state sponsorship of a private monoply such as casinos, is unconstitutional? If not, why wouldn't a state simply monopolize any industry, especially the most lucrative? I think in some states this is already done with state-sold alcohol.

Or perhaps it's a takings case? If there were a state with only one private lottery provider and the state then banned private lotteries and established its own identical to the former model for the "public use" of the revenues, then might that constitute a taking?

Well internet, what are your ideas?

[Richard Mason]

The fact that a person buys both lottery tickets and homeowners' insurance is explained if that person's instinctual weighing of probabilities consistently overestimates the likelihood of very low likelihood events. This error would make both the lottery ticket and the insurance policy appear more attractive. And it is reasonable to think that our gut instincts in this area are no good, since by definition we as individuals can have no statistically significant past experience of nanoprobabilistically rare events.

This explanation is not inconsistent with the "entertainment value provides worthwhile utility" explanation. Indeed, to say that "my lottery ticket gives me enjoyable daydreams of winning," and "my brain systematically overestimates the likelihood of a winning lottery ticket" is practically to say the same thing in different words.

[Jake]

Seeking rationales for gambling by people of limited means, Judge Posner notes that some "people are so desperate or miserable that their marginal utility of money is very low, which truncates the downside risk of a gamble. Suppose, to take an extreme case, that you have only $1 left in the world. There isn't much you can do with $1, so, even if if you were risk averse, your most sensible move might be to buy a lottery ticket, on the theory that it is really costless."

Extreme hypotheticals like this do not explain why the poor gamble on lottery tickets. The person with a last dollar in his pocket might just as well gamble on a last cup of coffee at Starbucks (though, to be sure, a dollar won't buy you a cup there), in the hopes of meeting the next new emergent entrepreneur and getting a fabulous job offer.

The real problem with Internet gambling is the same problem that besets so much we find on the Internet -- in all too many cases, there is no way to verify that what is promised is what you get. How is one to know what odds an Internet gambling site offers? There is no Nevada Gambling Commission to enforce transparency.

[Larry]

You didn't close your parentheses in the second paragraph.

[robert]

Casino gambling is, I think, also motivated by the illusion that we have the power in our hands--literally, in the case of someone who rolls the dice at a casino craps table--to control our fate and change our lives for the better (bettor?) That illusion is what blinds the gambler to the long odds of casino games; it is also what has allowed casinos to build palaces in the desert.

[John Carney]

What’s interesting about this is that one possible casino response actually makes the case for online gambling stronger. Casino operators no doubt would like to deny that their odds are worse than online gambling—and that they make up their higher overhead by providing other services like splashy shows, restaurants, spas and luxury shops. But since spending money on these things isn’t any more “productive” or responsible than gambling, this actually makes online betting more responsible. At least the gamblers aren’t wasting their money watching Celine Dion!

[David]

Judge Posner writes:

"In fact gambling is productive in an economic sense because it increases the expected utility of the gamblers; otherwise there wouldn't be gambling."

This is circular reasoning. In other words, Posner argues that gambling is good because it makes gamblers happy. Well, what if it doesn't make them happy, because they're addicted? Or, what if it makes them happy in the short run but miserable after they lose all their money? Is gambling more akin to entertainment (maybe an expensive dinner) or to heroin use? Or is it somewhere in-between? Before we can talk about laws relating to gambling, we need to arrive at a consensus about the nature of the beast.

Posner also writes:

"It is as productive as any other leisure-time activity that does not involve the acquisition of useful skills or knowledge."

Please define "useful?" Is golf "useful?" Fishing? Crochet? Proficiency at video games? Mystery writing? Blogging? :-)

This comment presupposes a value judgment that Judge Posner probably does not wish to make. If he does wish to make such a judgment, he should define "useful."

Finally, Posner writes:

"Granted, the attraction of gambling is a little mysterious from a rational-choice perspective."

I guess the Judge never bought a lottery ticket with the thought that he could win the jackpot and retire to a life of leisure and gluttony. :-)

In all fairness, neither have I. But millions of people buy lottery tickets for that reason every day. Or, for the same reason, spin the roulette wheel or bet thousands on a three of a kind. Perhaps this is a flaw in the theory of "rational choice."

[N.E.Hatfield]

Ahh...! The great "gamblers fallacy" - Fortune, Destiny and Lot. I can beat them all and the odds by the simple turn of the card or roll of the dice. The reality is it's big business - taxes being skimmed off the top are big business as well. So hence, the jurisdictional disputes. With all the other tax cuts, how are we to pay for our bread and circuses? I won't even mention schools. ;)

[alvin]

Judge Posner,

You write like you've never gambled in a Vegas casino? Sure, the odds may be pretty bad, but the casinos give you free drinks and there is usually a band playing nearby (inside the casino) and the cocktail waitresses aren't bad either.

[Thomas B.]

"Despite the fact that I am rationally aware the chances of my winning are negligable, some part of my mind distinguishes between "negligable" and "zero"."

The odds of finding a winning ticket are not zero, merely negligible.

[Brett Bellmore]

LOL! Thanks for the correction! Technically, I suppose the winning ticket could also appear in my hand by an extremely unlike quantum fluctuation teleport, since it's probability function does have a finite value within that volume. But I seem to have to take some action, however ineffectual, in order to enjoy the daydreams.

One might consider the purchase of a lottery ticket you're rationally aware of is a bad bet as analogous to the enjoyment of pornography; Scarcely anyone who partakes of pornography believes that they actually have a (non-negligable) chance of having sex with the woman portrayed. However, there is sufficient disconnnect between the rational and sub-rational processes that you can "game" the latter, and get some pleasure out of things you know do not advance the instinctual aims.

My purchase of lottery tickets is a rational way of exploiting flaws in my own economic rationality....

[Ivan M]

@Mr Posner:"It is doubtful, however, that this effect justifies the elaborate legal restrictions on the gambling industry."I think this is an understatement! I agree that gambling is largely a form of entertainment, rather than any investment to gamblers.Therefore, if this entertainment can be purchased for less at online casinos than at more "conventional" gambling establishments, it seems efficient for the law to evolve to restrict the latter rather than the former. However, we observe the opposite.

[David K]

POSNER writes:

"There isn't much you can do with $1, so, even if if you were risk averse, your most sensible move might be to buy a lottery ticket, on the theory that it is really costless. (Thus, welfare programs encourage gambling by reducing the cost of gambling away one’s financial resources.)"

- Does Judge Posner believe welfare perpetuates poverty? New thread topic?

[Nelson]

The question isn't about what's rational or irrational. It's about whether the government should make that choice or individuals. Somewhere I read that governments were created to secure our rights, not destroy them.

[N.E.Hatfield]

Rights, Rights, Rights. I'm sick of hearing about them especially by law students. Whenever I hear the word "Rights" all I can think of is Duty and Obligations. For every right, a duty and obligation must be imposed. ;)

[Paul]

I think that skill-based gambling (e.g., poker) should be distinguished from non-skill-based gambling (e.g., lotteries) in an analysis. Skill-based gambling allows actual monetary utility. There are individuals that support themselves comfortably by playing poker, because they play against other players and not against a casino. The casinos profit, not because of favorable odds, but because of transaction fees. This is similar to stock brokers or real estate brokers.

[caveatBettor]

I've been a member of Tradesports for over a year, and I observe that there are more than gamblers. There are noise traders, information traders, and risk managers.

[Drizztdj]

Bravo!

Any chance of educating the Representatives and Senators about odds and potential tax windfalls before they shutter the internet casinos and poker rooms?

[Caio da Hora e Almendra]

Sorry professor, I´m from Brazil and don´t understand much about american law. In my country, gambling also is forbidden. However, the 'animus iures' of this proibition is the attempt to prevent money laundry. A casino is a place that, mostly, doesn´t sells nothing, however, profits a lot. More than this, it doesn´t matter how much it sells, how much employees it has or how much 'consumers' it has, for the amount the casio profit. That´s the ideal establishment for a drug dealer to put his dirt money on. Don´t you agree?

[SheetWise]

... the net utility of (Internet) gambling soars because there is no longer a net expected financial loss.

So the legal casinos are correct that they offer a measure of control over gambling: by offering only bad odds, they reduce the demand for their product.

There is always a net expected financial loss. Internet games generally have the same expectation as those offered in brick & mortar casinos.

I'm not sure about your distinction of "legal casinos" vs Internet -- as far as I know, they're all legal. B&M casinos almost always offer zero memory games whose expectation is around -1.5% (craps or baccarat). B&M casinos do offer bad games, just as Internet casinos do -- but the player has choice. Where you find "bad" odds is in state run monopolies -- lottery (-50%), horse and dog racing (-25 to 30%).

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