How slot machines work - and why you may want to play them only after considering it

The gaming industry is massive business in America, injecting an estimated US$240 billion into the country's economy every year, together with $38 billion in tax collection and 17 million jobs to boot.

What may not be known is that electronic gaming machines like slot machines and video poker machines make up the majority of all of that economic activity. In Iowa and South Dakota casinos, for example, such machines have been responsible for up to 89 percent of round-the-clock gaming income.

Spinning-reel slots alone are profit monsters for most casinos, paying out higher returns than table games like blackjack, video poker machines and other forms of gambling.

What makes slot machines such consistent cash cows? Partly, it is because casinos can conceal their actual cost from even the most experienced gamblers. Here you can check out all slot casino rankings.

The cost of a slot

An important economic concept is that when the price of something goes up, people will desire it less.

But that assumes price transparency, which exists in most of the day-to-day purchases we undertake. That is, with the exception of visits to the physician's office and maybe the auto repair shop, we have knowledge of the cost of most goods and services prior to making our decision to pay for them.

Slots might be worse than the doctor's office, in the sense that most of us will have no concept of what the actual cost of our wagers are. That would imply the law of supply and demand fails.

The gaming operators would usually mentally operate in terms of the so-called average or expected house edge per wager placed by players. Basically, it's the built-in long-term edge of the game. For an individual player who has limited exposure to the game, his or her "price" would look radically different. 

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 got paid and heads to the casino with $80 to spend an hour playing on Tuesday night. There are actually only three possibilities: He spends it all, wins a big jackpot and is much ahead, or wins or loses a small amount and departs before the odds are strongly against him.

Of course, the first outcome is much more likely than the next two – it must be if the casino is to maintain its house edge. The funds to pay for large jackpots are deducted from frequent losers (who are cleaned out). Without all these losers, there will be no large winners – which is exactly the reason why so many people gamble in the first place.

Increasing the cost

Last but not least, the casino is selling excitement, which consists of hope and variance. While a slot may offer a low house edge for management purposes, for example, 4 percent, it can and often will extract all of George's Tuesday night bankroll and do so in the time it takes to blink your eyes.

This is a function mainly of the pay table variation in the slot machine – i.e., all of the winning symbol combinations and the payoffs for each one. While the pay table is visible to the player, the probability of producing each winning symbol combination is not known. These probabilities, of course, are a principal determinant of the house edge – i.e., the long-run expense of the bet.

This weird ability to hide the price of a good or service offers an opportunity for casino management to raise the price without the players knowing – if they are brave enough.

Being brave to do it

Consequently, many operators refrain from raising the house advantage of their slot machines, believing that players can identify these price surprises.

Our new research, however, has found that improvements in the casino advantage have produced immense revenue increases with no detection on even by astute players. In a number of comparisons between two otherwise similar reel games, the high-priced games produced considerably more revenue for the casino. These findings were confirmed in a second study.

Additional research showed no signs of play migration from the expensive games, although their cheap counterparts were placed just a 3 feet distance away.