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How slot machines work – and why you should think twice before playing them The price of a slot. An important economic theory holds that when the price of something goes up, demand for it tends to. This difference in price perspective is rooted in the gap between the. When the High Limit Slot Lounge opened, Cosmopolitan touted a new system for “processing jackpots right at the machine.” As most slot players know, winning a jackpot of more than $1,200 in a Las Vegas casino means filling out tax forms so The Man can get his cut of your hard-won windfall. It’s annoying, but it could be worse.

The gaming industry is big business in the U.S., contributing an estimated US$240 billion to the economy each year, while generating $38 billion in tax revenues and supporting 17 million jobs.

What people may not realize is that slot machines, video poker machines and other electronic gaming devices make up the bulk of all that economic activity. At casinos in Iowa and South Dakota, for example, such devices have contributed up to 89 percent of annual gaming revenue.

1. There is no such thing as a ‘loose’ or ‘tight’ slot machine. In modern casinos, slot machines are programmed to deliver a precise return percentage, somewhere around 95 per cent. That means 95 per cent of the money that goes into a slot machine is paid back out to the players and the casino keeps the rest.
2. Slots are completely random. Casinos don’t want you to know this, but slot machines are completely random in nature. Although they are weighted to pay out at a certain rate, this is still in line with the randomness of results that a slot will produce. Each spin is completely independent of the previous spin.

Spinning-reel slots in particular are profit juggernauts for most casinos, outperforming table games like blackjack, video poker machines and other forms of gambling.

What about slot machines makes them such reliable money makers? In part, it has something to do with casinos’ ability to hide their true price from even the savviest of gamblers.

The price of a slot

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An important economic theory holds that when the price of something goes up, demand for it tends to fall.

But that depends on price transparency, which exists for most of the day-to-day purchases we make. That is, other than visits to the doctor’s office and possibly the auto mechanic, we know the price of most products and services before we decide to pay for them.

Slots may be even worse than the doctor’s office, in that most of us will never know the true price of our wagers. Which means the law of supply and demand breaks down.

Casino operators usually think of price in terms of what is known as the average or expected house advantage on each bet placed by players. Basically, it’s the long-term edge that is built into the game. For an individual player, his or her limited interaction with the game will result in a “price” that looks a lot different.

For example, consider a game with a 10 percent house advantage – which is fairly typical. This means that over the long run, the game will return 10 percent of all wagers it accepts to the casino that owns it. So if it accepts $1 million in wagers over 2 million spins, it would be expected to pay out $900,000, resulting in a casino gain of $100,000. Thus from the management’s perspective, the “price” it charges is the 10 percent it expects to collect from gamblers over time.

Individual players, however, will likely define price as the cost of the spin. For example, if a player bets $1, spins the reels and receives no payout, that’ll be the price – not 10 cents.

So who is correct? Both, in a way. While the game has certainly collected $1 from the player, management knows that eventually 90 cents of that will be dispensed to other players.

A player could never know this, however, given he will only be playing for an hour or two, during which he may hope a large payout will make up for his many losses and then some. And at this rate of play it could take years of playing a single slot machine for the casino’s long-term advantage to become evident.

Short-term vs. long-term

This difference in price perspective is rooted in the gap between the short-term view of the players and the long-term view of management. This is one of the lessons I’ve learned in my more than three decades in the gambling industry analyzing the performance of casino games and as a researcher studying them.

Let’s consider George, who just got his paycheck and heads to the casino with $80 to spend over an hour on a Tuesday night. There are basically three outcomes: He loses everything, hits a considerable jackpot and wins big, or makes or loses a little but manages to walk away before the odds turn decidedly against him.

Of course, the first outcome is far more common than the other two – it has to be for the casino to maintain its house advantage. The funds to pay big jackpots come from frequent losers (who get wiped out). Without all these losers, there can be no big winners – which is why so many people play in the first place.

Specifically, the sum of all the individual losses is used to fund the big jackpots. Therefore, to provide enticing jackpots, many players must lose all of their Tuesday night bankroll.

What is less obvious to many is that the long-term experience rarely occurs at the player level. That is, players rarely lose their $80 in a uniform manner (that is, a rate of 10 percent per spin). If this were the typical slot experience, it would be predictably disappointing. But it would make it very easy for a player to identify the price he’s paying.

Raising the price

Ultimately, the casino is selling excitement, which is comprised of hope and variance. Even though a slot may have a modest house advantage from management’s perspective, such as 4 percent, it can and often does win all of George’s Tuesday night bankroll in short order.

This is primarily due to the variance in the slot machine’s pay table – which lists all the winning symbol combinations and the number of credits awarded for each one. While the pay table is visible to the player, the probability of producing each winning symbol combination remains hidden. Of course, these probabilities are a critical determinant of the house advantage – that is, the long-term price of the wager.

This rare ability to hide the price of a good or service offers an opportunity for casino management to raise the price without notifying the players – if they can get away with it.

Casino managers are under tremendous pressure to maximize their all-important slot revenue, but they do not want to kill the golden goose by raising the “price” too much. If players are able to detect these concealed price increases simply by playing the games, then they may choose to play at another casino.

This terrifies casino operators, as it is difficult and expensive to recover from perceptions of a high-priced slot product.

Getting away with it

Consequently, many operators resist increasing the house advantages of their slot machines, believing that players can detect these price shocks.

Our new research, however, has found that increases in the casino advantage have produced significant gains in revenue with no signs of detection even by savvy players. In multiple comparisons of two otherwise identical reel games, the high-priced games produced significantly greater revenue for the casino. These findings were confirmed in a second study.

Further analysis revealed no evidence of play migration from the high-priced games, despite the fact their low-priced counterparts were located a mere 3 feet away.

Importantly, these results occurred in spite of the egregious economic disincentive to play the high-priced games. That is, the visible pay tables were identical on both the high- and low-priced games, within each of the two-game pairings. The only difference was the concealed probabilities of each payout.

Armed with this knowledge, management may be more willing to increase prices. And for price-sensitive gamblers, reel slot machines may become something to avoid.

The Cosmopolitan Las Vegas recently opened a new High Limit Slot Lounge.

The high limit area is spacious and welcoming, and the free cookies are spectacular. No, really, there are cookies.

Unfortunately, photos are not allowed in the Cosmopolitan’s High Limit Slot Lounge, so we cannot show you the photo you are currently viewing.

When the High Limit Slot Lounge opened, Cosmopolitan touted a new system for “processing jackpots right at the machine.” As most slot players know, winning a jackpot of more than $1,200 in a Las Vegas casino means filling out tax forms so The Man can get his cut of your hard-won windfall.

It’s annoying, but it could be worse. The IRS has suggested $600 be the cut-off. Don’t get us started.

Fastpay is available at Cosmopolitan exclusively, so we figured we should find out more.

Research fuel. And possibly the last loss-leader in Las Vegas.

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Cosmo makes good on its promise, as Fastpay provides a number of advantages to the player. And the casino, of course, but we’ll get to that in a minute.

As advertised, Fastpay allows jackpots to be processed with zero delay and without attendant assistance. For most players, waiting for a hand pay is exciting stuff, but for high limit players, they’d prefer to just play on. Fastpay lets them do that.

Also as promised, Fastpay does reduce “legwork and paperwork, freeing up more time for play.” The system also “eliminates errors associated with manual completion of paperwork,” whatever those might actually be.

The secret to Fastpay is players provide their personal information before they play. Having one’s information in the casino’s system means when a taxable jackpot is hit, the player simply enters a PIN, the paperwork is done electronically, and the player can continue with nearly zero delay in play.

Fastpay is just that easy.

During our visit, we saw a player hit at least three taxable jackpots (at one point, she had $30,000 in credits on the machine), and her play was virtually uninterrupted.

Someday, “handpays” in Strip casinos could be a thing of the past. Like 3-to-2 blackjack and mob whackings.

If you consider hand pays can often take 15 or more minutes to complete, that’s an additional 45 minutes playing time which otherwise would have been idle.

Which brings us to the other reason Fastpay is ingenious. It allows players to play more. Playing
more tends to work out really well for the casino.

These handy charging stations found between machines in the high limit slot area also encourage customers to keep playing. Sorry it’s blurry. Cocktail service in the high limit lounge is really, really quick.

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Fastpay is only available in the Cosmopolitan’s High Limit Slot Lounge. Which makes sense, as Fastpay really only makes sense when a player gets multiple taxable jackpots, and that’s much more likely to happen in a high limit room.

Fastpay is just one example of how Cosmopolitan is getting serious about its casino like never before. The resort took years before it had its first two profitable months in the latter part of 2015.

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Find out more about what the Cosmo is up to in CEO Bill McBeath’s interview with KNPR.

Fastpay in the Cosmopolitan’s High Limit Slot Lounge seems to be a win-win.

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Wish we could say we got to personally use Fastpay during our most recent visit, but ultimately, we ended up enjoying some really, really expensive free cookies.