Mr. Seligman is a columnist for Fortune and the author of A Question of Intelligence (Citadel Press).
THIS article is driving me crazy. First, it is sinking in, after several days of staring at the headline above, that the issues it raises are more complex than posited when I accepted the assignment. Second, the passage of those several days has created a certain tension between two cherished goals: 1) assured manuscript delivery by vouchsafed deadline date and 2) unstinting participation in this month's poker game, only two days off as I write. Furthermore, I start out knowing that no matter what story line I come up with, a significant fraction of NR readers will unbudgingly go on thinking that gambling is bad. Several years ago, I was called by an investment-banker friend who asked if I would mind having lunch with her and a client -- a conservative intellectual who happened to run a steel company, was said to admire my Fortune column, and shared my hard-line perspective on numerous issues of the day. Feeling flattered, I accepted and, until the very end of our meeting, felt I had come to know a kindred spirit. But as we were leaving La Cte Basque, my newfound friend asked a bit diffidently about the numerous references in the column to casinos and race tracks. Was it really true, he asked, that I hung around such places? I said it was, and he said, ``Oh,'' looking embarrassed. Social conservatives tend to see gambling as a big negative on the values scorecard. Intellectuals feel it betokens a want of seriousness. Economists of every persuasion go around arguing that it is ``unproductive'' -- that, in the words of Paul Samuelson, ``it involves simple sterile transfers of money or goods between individuals creating no new money or goods.'' The italics are Paul's, as is the familiar refusal to accept that gambling is terrific entertainment.
Gambling has been a major theme in my life since approximately age twenty, and I seem to have come by the habit honestly. My father was a heavy sports bettor for much of his life, and my mother was eternally loving and attentive -- precisely the kind of mother who, according to Freud, leaves men feeling forever lucky as they march through life. Anybody wishing to observe several score characters radiating this state of grace in unison has only to board the 8 p.m. flight from Los Angeles to Las Vegas. The atmosphere features loud hoots and unconstrained hilarity. The 1:45 a.m. flight back is much more subdued; to be sure, the guys have had a long day.
THERE are several things to be said for gambling, the first of which is: You really might win. Furthermore, you might win big. In fact, you almost certainly will win big if you hang in there and structure your bets properly. Here I am sidling up to one of my two theoretical contributions to the economics of gambling: the counterintuitive view of long-shot betting as a form of saving.
The saving process, as we all know, involves the conversion of a stream of income into a lump of capital. A man who takes $100 out of his weekly paycheck and puts it under his mattress might get criticized for failing to maximize investment returns, but no economist would deny that the $5,200 he had accumulated after a year was the result of saving.
Now imagine another chap -- one who also wishes to convert $100 a week into $5,200 but feels he is entitled to a few kicks along the way. Since he luckily lives in downtown Las Vegas, it is convenient for him to visit Binion's Horseshoe casino once a week. His plan on these visits is to throw $100 on the table each time, hoping eventually to get lucky and win something like $5,200. Unfortunately, no casinos offer 51 to 1 bets to low rollers, but there are a number of casino games in which you get huge long-shot payoffs by winning five or six times in a row and letting your profits ride. If you know what you are doing and elect to play blackjack with a single deck (possible at Binion's but hard to find on the Strip), you are essentially in a fair game, i.e., the house edge is minimal (and the casino depends for its profits on the inept). So if you sit down at the $100 table and win six hands in a row, you will leave the table with something like $6,400. The chance of winning an even-money bet six times in a row is only 1.56 per cent, but the chance of winning one such bet in 52 weekly visits is 56 per cent. So you are favored to win at least once a year, and if you do so, your lump will be substantially larger than that of our mattress man.
It is possible to imagine various real-world problems arising out of this approach to nest-egg building, but the basic conception is rock solid. If you repetitively play a fair game, and structure your bets so as to generate frequent losses and occasional big wins, then you are converting income into capital. Indeed you are doing that even if the game is not quite fair. If your weekly savings budget was getting tossed on the craps table instead of the blackjack table, you would possibly be fighting a house edge of 0.6 per cent, but you would still be favored (53 per cent this time) to convert $100 into $6,400 at least once a year.
My own preferred and most successful form of saving has featured ninth-race triples, also known as trifectas, at New York's Aqueduct and Belmont racetracks. A triple is a long-shot bet, requiring one to pick the first three horses to cross the finish line, in order. If you buy a triple ``box,'' which consists of six bets featuring all combinations of your three horses, you don't have to worry about the order. A triple box costs $12, and my standard bet is four or five boxes, all on horses selected randomly by a BASIC program lovingly conceived for this purpose alone. (It prompts you for the number of horses in the race, the program numbers of any scratches, and the number of boxes you wish to buy, then spits out your selections.) If 12 steeds are running, a bettor with five boxes going has a 2.3 per cent chance of hitting a triple, and if he plays this game once a week, he has a 70 per cent chance of hitting at least once a year, and over the years he has a serious expectation of latching onto some sizable payoffs. Since 1986, when I first began putting the results of my gambling into a spreadsheet, I have had around 300 betting days that featured triples, of which only a handful were winners. But these included payoffs of $14,611, $11,225, $9,644, $3,794, and $3,394. And even though New York racetracks have a horrifying edge of 25 per cent on triple bets -- i.e., payments to winners represent only about 75 per cent of the money bet -- the spreadsheet shows me way ahead of the game. So it is fairly easy to view the recurrent losses of $48 or $60 as deposits into a savings account.
POSSIBLY you are wondering about my other contribution to economic theory. It was built on an insight gleaned from our monthly poker game. This began in 1953 as a low-stakes limit game but soon upgraded itself to table stakes (in which a player can bet any amount up to the total of chits and chips he had in front of him when the deal started). The greybeards still in the game know there is a possibility of winning or losing as much as $1,000 in an evening, but a more likely outcome is a swing under $500. An interesting thing about those figures is that they were far larger back in the Fifties, when we were all much poorer. It was then common to win or lose over $2,500 in one session -- around $14,000 in today's prices. Whatever else it was doing, the game in those years clearly served as the great monthly adventure in our lives, one that was doubly wonderful in that, unlike Antarctic exploration or rappelling in the Rockies, it came with no physical risks or material discomfort. In those days, we tended to play all night, drink quite a lot while doing so, then go out for breakfast before wandering off to a barber and the office. Once, in 1958, I personally managed to lose $1,600 -- at a time when my annual salary was $16,000, I had no savings to speak of, and I was the sole support of a family of four. Breakfasting with the gang at a Lexington Avenue coffee shop, I did my best to feign insouciance over the night's results, but the refrain that kept rattling in my head was: How in hell do I get out of this mess?
The answer, revealed to me in the ensuing months, is at the heart of my theoretical contribution, which states: Gambling has a positive effect on economic activity. A significant fraction of the winners will regard their loot as ``found money'' and rush to spend it, and quite a few of the losers will feel an instant, urgent need to augment earnings, which in my case meant toiling mightily in the freelance market. Please do not draw any inferences from the fact that I am still so toiling.
