1%

Of the places I’ve been to, there’s one entire city that I think would singularly defy explanation to an ancient visitor.  It isn’t one based on manufacturing, like Shenzhen, or trade, like Dubai,  or a port, like Antwerp, or a capital seat of power, like Washington D.C.  It’s not even a city based on mirages, like Los Angeles, or tourism, like Orlando.  Because it wouldn’t be that hard to explain these places.

Buildings are a concentration of energy and resources, and a reflection of our values and culture.  An ancient Egyptian looking up at the skyline, would see the Pyramid of Khufu, the deity-king, and go about his business, knowing that in his world, the link between the afterlife and this life was sound.  An ancient European, looking at the nearest castle or church, would have similarly seen the relationship between herself, the powers that be, and the powers that govern the ever after.

Even in our modern world, you can pretty much look at any building and identify its reason for being.  Office towers – a clustering of service-industry companies.  Malls – our consumerist economy at work, and/or modern town centers.  Residential towers – lack of space in a city where people want to live.

But.  There’s an island in the middle of the South China Sea with some of the largest buildings in the world.  Likely, 99% of the population of the world will never go there, nor have a reason to.  And I’m not so sure an ancient visitor would have any idea what they were for, nor understand how they were built.  They aren’t residences, marketplaces, nor granaries, offices buildings, warehouses, or anything that could have existed a few hundred years ago.

Because these buildings?  They’re a type of factory built on a single mathematical probability, and that is the probability that over hundreds of thousands of games played, it will lead to a convergence towards a single number – 1%.  It is an island built on our modern world’s triumph of risk management.

I’m talking about Macau.

Now there are a lot of different directions we can go here, but I want to start with the sheer size of these buildings.

Ancient descriptions of splendor always interest me.  For example, Marco Polo, arriving at the court of Kublai Khan, marveled at the “greatest palace that ever was”, with gilded walls and a main hall so large that it could seat 6,000 dinner guests.  The Khan’s palace, like many other palaces, were built to awe, stupefy, and impress power upon their subjects and vassals.

Now of course, this kind of breathless praise is subjective, and dependent on the eye of the observer.  What if we applied this kind of writing to modern buildings?  How’s this one:

A massive pleasure ground filled with all sorts of marvels and luxuries, boasting 30 restaurants of cuisines from all around the world, accessible to guests by means of a gondola crossing a lake, nearly 6 football fields in size, activated with fountains that explode into the sky in a synchronized dance.  At the end of the voyage, guests are greeted by attendants who show them into a staggering hall accommodating nearly 10,000 pleasure-seekers at once.  Above them, more than 1,000 stately rooms await, bedecked in lavish gold leaf and precious metal furnishings.  Plush carpeting create a serene environment for these guests of honor, who arrive at their rooms passing carousels and ferris wheels arranged throughout the lobby, made entirely of floral arrangements.  Artwork carefully selected from around the world and across the span of history, with priceless Qing Dynasty treasures and more than $120 million worth of contemporary paintings alike, greet these visitors.  Costing a staggering sum of more than $4 billion dollars, constructed over a 2-year period with a city’s worth of laborers, this pleasure palace is…the Wynn Palace in Macau.

Located in Cotai, the Wynn Palace is one of twelve casino resorts built with a similar level of stupefying investment.  At 400,000 square meters (4.5 million square feet), its gross area is larger than most buildings in North America, including the Mall of America (the largest mall in America) and the One World Trade Center (the tallest building on the entire continent), and larger than Disneyland or Disney World Magic Kingdom, including parking lots.  It’s larger than airports.

To build the Palace, Wynn invested more money than went into the One World Trade Center, a building whose reason for being, in Manhattan, is more or less crystal clear.

The Wynn’s neighbor, the Venetian Macau, ranks among the top 5 largest buildings in the world.  At over 1,000,000 square meters (250 acres), the single casino resort is more or less the size of Hudson Yards’ East Yard (home of 4 skyscrapers each over 900 feet tall, a retail mall, hotel, 2 million square feet of residential properties).

And on the Cotai Strip alone, there are ten more like them!

Returning to our ancient visitor.  No doubt he would be astounded to step foot inside one of these palaces, although he would have no idea what people were doing inside of them.  He probably would have been even more astounded by the fact that unlike ancient tombs, palaces, temples, or castles, stepping inside one of these modern palaces is completely free of charge.

Now imagine you’re the ancient visitor, entering a casino in Macau.  The casino floor sprawls out for, literally, acres.  There are people with their eyes glazed over the slot machines, seemingly engaged in some sort of modern-day temple offering.  They insert tokens of monetary value into a metallic, neon offering jar.  Capriciously, it offers some back.  Other times it swallows the tokens, as if appeased.

If you walk a little further, out to the open expanse of the tables, then you might see something that you can relate to.  No machines here.  Just a simple exchange between two humans, and a crowd of people surrounding them.  The two humans seem engaged in some sort of rite.  One of them wildly gesticulating, engaged in all sorts of rituals of extreme concentration: blowing on some pieces of paper, mumbling what seem to be incantations, shouting words as they flip them over, peeking slyly under them, slamming the side of a hand down and pretending to ‘chop’ the paper in half.

This is baccarat in Macau.  

This is a game where the house edge is slight, and the actual decision-making made by players is almost nonexistent.  Add to that the influence of native Chinese superstitions, and you get a game where paradox of the illusion of control looms large.

In baccarat, or punto cano, one plays the game by betting on one of three outcomes: whether the “banker”, usually the dealer, or the “player”, usually another player, will  win.  Or that they will tie.  The two sides are dealt cards, and these two players then flip them, nothing else.  Then they are issued new cards according to strict rules.  Literally, after you bet on one of these three outcomes you have nothing else to decide.  

And for the player herself, she does nothing else but flip the cards or draw them according to preset rules.  There is literally nothing to stop casinos from replacing the “players” and dealers with robot arms.  But perhaps for this simple reason, an elaborate edifice of rationalizations in the form of rituals and superstitions, arises.

Gambling has a rich mythology. From the earliest days of human society, casting lots —often by drawing straws or tossing dice made from the knuckle bones of sheep—was a way to ask the gods for answers. The high priest who wanted influence soon learned to become a “sharper,” positioning the straws just right, shaving the dice, or even devising elaborate rules to ensure that more than random chance would determine the outcome. In many societies, it was a serious crime for anyone but the high priest to touch the instruments used to divine the will of the gods. This imbued the dice with a sacred quality. It also made sure no one could tell if they were loaded.

A screen by the table displays whether the banker or player has won previous rounds, in alternating colors.  What is this screen even for?  The result of a previous hand has literally nothing to do with the next round of play.  

But when a player gets hot, you see the player’s marker blazoned in blue or red, curling back down and around, like an improbable banner, a dragon’s tail.  You see players in states of concentration, chain-smoking, guzzling tea by the gallon, “cutting” their cards with a big fist, pounding it down on the table, then chopping it in half before taking the edge of the card, like it weighs a ton and he’s struggling against the weight of his fight against fate, peeling it back with the force of the spirits unleashed in his hands.  Then you see tables erupting in pandemonium as players go on streaks, crowds gathering around the table four deep, jostling for position to bet, often through reps located closer to the action, chips flying above and through the crowd and landing all over the table, and then ladies of the night creeping up and slipping their phone numbers to the big winners.

The energy is intense, and it makes you start believing it, this thing called luck.

And on second thought, maybe it’s not so far-fetched to believe that an ancient visitor would have related to what goes on there.

*******

Gambling is 90%+ of revenues in Macau.  In Las Vegas, that percentage is closer to 40%.  Baccarat alone accounts for 80% of revenues in Macanese casinos.  And of this 80% of revenues, most of it is from VIP gaming, where the minimum bet size is $5,000 US dollars.  

By some estimates, the actual count of these VIPs is in the thousands or tens of thousands, meaning that it is the population of a small town driving the revenues of a small country’s GDP.

The mechanics of the baccarat game are worth reiterating.  

When you play baccarat, unlike most casino games, where there is no strategy or decision making.  You do not decide to draw or stand, like blackjack.  You do not have dozens of options, like in roulette.  You do not look at the other players’ cards or try to read their faces.  You can try to card count, but the consensus among the best card counters alive, including Ed Thorpe, are that “despite the resemblances between baccarat and blackjack, the favorable situations detected by perfect card counting methods are not sufficient to make the game favorable.”  

A more appropriate analogy might be to think of it as a team-based version of casino war.  There is no winning strategy.  The odds are given.  The “banker” will win 45.9% of the time, and the “player” will have the upper hand 44.6% of the time.  And you can bet on either.  Less than 1% of the time, they will tie.

The net of these three outcomes results in a 1% advantage for the casino.  It’s the slimmest of odds, and it’s the statistical substrate on which nearly billions of dollars in buildings have been built.  

Take some time to think about whether you would build a business on a 1% margin.  Does that sound appealing?

You might be saying that if it’s a sure thing, then of course!  

But the problem is that probabilities are not sure things.  In fact, because the house edge is so slim, in short games, small volumes, and large hands, baccarat players can go on inexplicable streaks that wreck holes in casino vaults.

Bill Zender, former Nevada Gaming Control Agent, sums it up: “your risk is 100 times your average bet.  So if a guy is betting $10,000 a hand, he could conceivably win $1 million from you.  That’s within two standard deviations, so it can happen.”

And in a game where VIP regularly wager half a million dollars a hand, the casino can lose tens of millions of dollars in minutes.  If this sounds theoretical, let’s take a trip back to 1990.

This was the era of one of the greatest bubble eras in human history, with its epicenter in Japan.  Residential land in Tokyo was worth $6,000/sqm.  That’s more than $60,000 a square foot!!!  The Nikkei stock index had quadrupled in less than 10 years.  The appraised value of the Imperial Palace was reportedly higher than the land value in California.  Reeling from the heights of their stock market, Japanese banks, companies, and businessmen were on a shopping spree, snapping up properties in Manhattan and London and “priceless” artworks the world over.  It was, for many Japanese companies and businessmen, the height of their arrogance.   

It was in this milieu that two real estate tycoons met.  One was a shadowy Japanese businessman named Akio Kashiwagi.  Rumored to have ties to the yakuza, Kashiwagi was known among casino owners to be a whale, one who would wager hundreds of thousands of dollars a hand.  And for this reason, he was widely courted.

His game of choice was baccarat, and he was the type of player to play big hands and have the ability to walk away with profits.  Exactly the type of player that casinos both love and fear.  In effect, because of the even nature of the game, a casino owner inviting a whale to play is himself making a gamble – that the combination of circumstances, custom rules, and setting will induce the player to stay as long as possible to let the slim 1% odds play out.

The second tycoon?

None other than our current president, Donald Trump.

This was their second meeting.  In their first meeting, Kashiwagi walked away with $6 million of the Trump Plaza’s money.  Earlier in the year, he had blown a $20 million hole in the vaults of the Diamond Beach casino in Australia, almost bankrupting it.  In other words, he was a fearless and skilled(?) gambler.

Now in their second encounter, Kashiwagi wagered $18 million an hour, playing a hand every 50 seconds.  At one point he had looted Trump’s vaults of that amount, $18 million.  The RAND consultant/mathematician that Trump had hired, along with Trump himself, watched in confoundment and extreme anxiety as the pile of $5,000 chips overflowed off the felt onto the carpet.

It was more money than the entire rest of the casino had lost or even wagered that weekend, meaning that this single chain-smoking businessman was single-handedly wrecking the hotel’s profits for the year.

As the marathon gambling session went on, the grindstone of the ever-present 1% odds began to work in Trump’s favor.  Kashiwagi started giving back his winnings, millions at a time.  He was down $10 million with every intent to continue playing when Trump decided to call it quits, reportedly against the terms of the $12 million freeze-out agreement that had been negotiated.

The point is not what happened.

It’s that the house edge of 1% is not assured.  A casino’s very fortunes can swing on the volatility of one player.  It takes time for probabilities to play out.  The probabilities also play out over multiple players.  Getting as many people to play, and staying as long as possible, is the only way to ensure that the probabilities work out in the long run.

Returning to our ancient visitor again.  By this time, having explained the workings of the casinos to him or her, perhaps explaining the game as a battle of spirits or gods, what would the game look like?

Macau, as a machine that crunches half a trillion dollars in rolling chips, the clay tokens thrown or carefully slid across the felt tables by players, making countless glances into the edges of their cards.  Millions of cards folded beyond recognition, thrown across the table, billions of dollars exchanged into chips, and as the probabilities roll on across millions of plays spanning thousands of hours, a residue.  A layer at the top, the 1% that is the house take, resulting in the gross revenues that drive the entire place.  A place where the vagaries of superstition, fortune-telling meet the caprices of probabilities and fortune, and have largely been…controlled.  

Essentially, a factory where thousands of hands transform money into revenues for the casino.  And that, is the reason for Macau’s very existence.  

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s