Wednesday, March 10, 2010

Casinos Profit with Game Theory

Say you are playing in a poker tournament at a casino. The initial buy-in is $65 and gets you 2,500 chips (2.6 cents a chip). You also have the option of buying an additional 500 chips for $5 more (1 cent per chip). None of this additional buy-in money, however, goes into the prize pool - it goes straight to the casino. Do you buy the additional chips?

If your opponents are buying the extra chips, you better buy as well to keep up. And, if they are not buying, you should buy to get a chip advantage. So, everybody has an incentive to buy. But, if everyone buys, no one has an advantage. Everyone is worse off from spending the $5. The casino, however, makes a nice profit by placing the players in a Prisoners' Dilemma. Nice.

HT: Mind Your Decisions blog

1 comment:

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