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Understanding The House Edge
Understanding The House Edge
The basics of gambling are really very simple. Although the rules of each game are different, the fundamental principle is essentially the same for all of them. Whether it’s a hand of Blackjack, a spin of the roulette wheel, a roll of the dice at the craps table, or a spin at the slot machine, players place a bet and are betting against the casino (also known as the house). When the players lose, the house takes their bets. When the players win, the house pays their bets.
In principle that is practically all you need to know to start playing. Of course, you will also need to know the rules for any specific game that you want to play, but they are generally quite simple to learn. However, in our opinion it is at least worth having a basic understanding of how the casino game works.
Specifically, you must understand how they make money and be familiar with the concept of the house edge and payment percentages. You also need to understand why it is possible for players to win money even if the odds are against them. We explain all these things on this page.
How Casinos Make Money
Games are essentially all games of chance, which means that a player is ultimately dependent on luck. There are some games that also involve an element of skill, such as Blackjack, but luck is generally the primary factor in determining whether or not a player wins. However, this does not mean that a casino has to be lucky in order to make a profit from the people who play its games.
Each game provides a long-term advantage for the house, and this is how they make money.
The edge that is built effectively in each game is known as the house edge. This advantage means that, over time, a casino is always going to make money. The house edge exists because casinos do not pay winning bets according to the true odds of the bet. As such, they are technically making money every time a player bets money.
Although the house does not win every bet, mathematically speaking the odds are always in your favor. This is why casino games are known as negative expectation games, because the long term expectation is negative.
The house edge
Now we are going to use an example to show how the house edge works in practice. Let’s say you were playing roulette and betting $ 1 on a single number for each spin. A roulette wheel has 37 numbers (European version) or 38 numbers (American version), so you have 1 in 37 or 1 in 38 odds of winning your bet. We are going to use the European version for this example.
Theoretically you can expect to win your bet once every 37 spins. In practice it doesn’t exactly work like this, because of the standard deviation and difference that we explain a bit later, but in the long run, each number should rotate approximately once every 37 turns. For the sake of this example, we are going to work on the basis that each number appears exactly once every 37 spins.
If a casino offered true odds at roulette, then the players must reach equilibrium in the long run and the casino would win no money. They are in business to make money, so the house edge is very important to them.
The true odds for a single number bet on roulette is 36: 1. If they were offered these odds, then their $ 1 bet would return a total of $ 37 if you win: the $ 1 of the original bet plus $ 36 in winnings. Now, since such a bet must win every 37 spins, then your expected losses would be zero. During 37 spins you would bet a total of $ 37, obtaining a zero profit on 36 spins and a profit of $ 37 on 1 spin and, therefore, the breakeven point.
However, the actual odds offered for a single bet on roulette are 35: 1. So for 37 spins you would still bet a total of $ 37 and still lose 36 spins at a cost of $ 36. Your winning spin, however, will only give you a profit of $ 36 for a profit of $ 35. So your Expected losses for every $ 37 wagered are $ 1. $ 1 as a percentage of $ 37 is 2.7%, making the house edge for this game 2.7%. Another way of looking at it is that the payout percentage for the game is 97.3% (100% – 2.7%).
The house edge / payout percentage is the same regardless of what bet you make on the game. This means that for every $ 100 wagered on roulette, the theoretical house win is $ 2.70. While a casino wouldn’t exactly make $ 2.70 for every $ 100 wagered, over millions of spins it would average roughly that figure.
It should be noted that the house edge is not the same in all games and there is an obvious advantage playing games where the edge is low. In theory, the lower the house edge the less you will lose over time. Therefore, the size of the house edge is something you should take into account when deciding which game to play. However, that shouldn’t be the only consideration, as some of the games with the biggest house odds also offer certain perks.