Thu | Aug 17, 2017

Walter Molano | Mr Casino Man

Published:Friday | February 10, 2017 | 2:00 AM

Casinos are irrational. They should not even exist.

In the aggregate, gamblers always lose. Yet, people still flock to them.

In 2016, an estimated 82 million Americans visited casinos. The gaming industry in the state of Nevada generated US$11.3 billion in revenue, making it the state's largest sector. Mining ranked fifth, even though Nevada has huge copper, silver and gold deposits. Slot machines, which have the worst odds, generated more than half of the industry's revenue.

Given that the United States is one of the most advanced market economies in the world, and that economists assume modern humans as rational utility-maximising individuals, why would a quarter of the population do something as illogical as to visit a casino?

Some researchers associate it with greed. John Maynard Keynes often referred to animal spirits to describe the impulses and emotions that induced humans to take on additional, and often irrational, risk.

Not only do economists use it to analyse investment decisions, but also consumer sentiment. Behavioural economists have recently made great strides in identifying the cues that shape animal spirits, such as the degree of market momentum and the dynamics of herd behaviour. But, the casino transcends aggregate human behaviour and delves into the darker side of human psychology by tapping into our competitive fears and desires.

A competitive environment is delineated by winners and losers. Under the rules of the jungle, if you are not a winner, then you are a loser. That could be why slot machines generate the most revenue. Every time it pays off, the lights whirl, the bells clang and whistles blow. This does not happen at the blackjack, poker or baccarat tables, even though the odds are better.

The cacophony generated by slot machines is not to signal the presence of a winner, but a reminder that everyone else is a loser. Therefore, it triggers a psychological impulse for people to try their hand at the one-armed bandit in the hope that they will become part of the winning set.

No one understands this concept better than President Donald Trump. Although his father was a property developer in New York City, and his son cut his teeth doing the same, his biggest gambit was in Atlantic City.

Except for Nevada, most states had outlawed organised gambling. However, in 1976, the electorate in the state of New Jersey voted to legalise gambling within the confines of Atlantic City. The young property developer saw it as his chance to capitalise on his current capacities as a large-scale builder and take advantage of the lucrative nature of the gaming industry.

In the early 1980s, Trump secured gaming licences and began to work on a series of new casinos along the boardwalk. It was at this time that the jargon of the gambling industry began to infect his vocabulary, dividing the universe into winners and losers. Of course, he always characterised himself as the winner and his opponents as the losers. Pedantic at first sight, it became a powerful symbol during the 2016 presidential campaign.

Donald Trump's billionaire status and extravagant lifestyle never represented the lumpen proletariat. However, they wanted to be part of the winning group, and definitely not part of the 'loser' crowed. The latter were often characterised as minorities and degenerates. Therefore, association with a winning group motivated many people to choose such an illogical candidate as their representative.

Psychology of winning

Unfortunately, the psychology of winning is deeply embedded in modern society. It is an element of the financial sector. Sub-investment-grade bonds have been a permanent feature of the financial markets. At one time, they were correctly called junk bonds, reflecting the high risk associated with the instruments.

Michael Milken, another notorious Wharton graduate, made a fortune peddling the bonds as lucrative investment vehicles and helped grow the industry from US$10 billion in 1979 to US$186 billion in 1989, before seeing the sector collapse and landing the young tycoon in jail.

After a few years in the doldrums, it rose from the ashes with a new name - high yield. The change in nomenclature gave it a positive and winning connotation, even though it was still as risky.

Wall Street loves to give positive titles to financial sectors, such as high grade, for less risky bonds. Likewise, lesser developed country, or LDC, instruments were transformed into the emerging markets, after the debacle of the 1980s debt crisis.

There is always a need to create a winning perception in order to induce individuals to act irrationally. Therefore, expect a lot of casino jargon and symbolism to accompany the presidency for the next four years, with much fanfare during every victory and muted silence for every setback.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com