Good Reading: Busting Vegas

Busting Vegas: The MIT Whiz Kid Who Brought the Casinos To Their Knees
by Ben Mezrich
HarperCollins Publishers
2005
ISBN: 9780060575113

Rating:


Can you guess the origins of modern risk management? That's right: Gaming. In its earliest form, dice games started the notion of probabilities and uncertainties that would carry forward into modern ideas of risk. As I'm always on the look out for examples of risk management and it was a pleasure to find some great ones in Busting Vegas to help demonstrate. Not only is the story very entertaining, but Ben Merzich gives us a great breakdown of the techniques used by a small group of MIT students that figured out how to beat the house - through risk management.

A little background before we get into it too much. Basically, the central character - this is a true story by the way - is named Semyon Dukach, a 21-year old MIT student and mathematical genius. Generally bored with his course work and his job in the computer lab, he gets hooked up with some fellow students who have figured out creative ways to beat casinos. And in these glorious methods for making millions, we can see some real risk management at work.


The House Always Wins

I've long had an affinity for Roulette (which is why I don't go to casinos). I was convinced at one point that I had a method for beating the game, which I soon found out was not true. I should have known better. The best I could ever hope to do would be to grind it out like Kinish in the movie Rounders. But the numbers don't lie and even that approach would end up with me losing over the long-term. With my luck I would end up in a game with Teddy KGB and my 3 stacks of high society promptly lost.

I've often said to team members that I'm teaching or coaching that faith, hope, and luck only exists in casinos and Churches - not on projects. In Rounders, Mike (played by Matt Damon) is able to remove elements of this uncertainty by having an uncanny knack for reading his opponents. He's picked up on aspects of the effort other than the task at hand (winning the card game) to discover something that will help him win. He's in effect really thinking out of the box and essentially minimizing his risk.

Our friends from MIT, lead by Semyon, have done something very similar, but on a greater scale. The MIT kids examined the entire situation when it comes to gaming and looked for opportunities to mitigate their risks.

Most people are familiar with the idea of card counting (these MIT guys actually do very little card counting). Card counting is legal, but the casino can still opt to put you out when they catch you doing it. This power the casino holds over its environment is what the casino uses to mitigate its risk (and maximize yours). Semyon and his friends keyed on this and looked at many environmental factors and how to press their advantage against the casinos. To win they had to play cards - they're focus was blackjack - but they understood the role of the environment and looked to leverage it for success. Not just a one-off success, but sustained success.


But Not With These Guys

The three techniques - what they do with the cards - are (1) a guided Ace to player, (2) Key-Sequence of played cards, and (3) a guided 10 to dealer. Through understanding the probabilities and odds, along with perfecting some environmental controls, this team was able to shift the percentages dramatically in their favor. All games of chance in a casino run between 2% and 5% to the casino; that is, for every dollar you play the casino wins between 2 and 5 cents over the long run. The house always wins. With these techniques, the MIT kids could swing the return to 51% to the player with the first two techniques for a single session (all the hands you played in a sitting), and with the third technique drive a 30% return per hand. Wow.

The specifics of how the techniques work are less important (for us anyway) than the ideas of mitigation and control that they performed. One way they controlled the environment was that they perfected the ability to "cut the deck" (in casinos for blackjack it is six decks) and know precisely how many cards are in front or behind. Powerful information.

Another way was to understand and take advantage of the dealers. The physical size of the hands of the dealer played mattered to these guys so that they could catch a glimpse of cards (the leveraged small and large hands). The dealer's skill matter too. In fact, they often wanted the most experienced and precise dealers - because they were predictable. These dealers would shuffle precisely, a one-over-one split, and consistent movement routines, enabling them to track and follow a single card through the shuffle. Amazing stuff.

They also took advantage of the environment in an innovative way. By hiding in plain sight. These guys would disguise themselves, not with dark glasses and cap pulled down over their eyes, but by becoming superstars, high-rollers who came in like the owned the place. The would bet big as soon as they sat down. The were hyper aware that the casino was always watching, but they turned that on its head by basically putting their faces right into the camera. The would beat the casino then expect to be comped. It must have been a ride and it certainly sounds like it the way Merzich tells it.


The Moral of the Story

Not Merzich's book, but this post. Never mind the morality of relative sinfulness of gaming. We're talking about risk management. And ultimately, these MIT whiz kids got it - they could count cards all day long but that is reactive behavior. Innovation of techniques could be discovered by considering the risks that exist in the total project environment. And, through considering these things, they could become proactive and drive the casinos to their knees.

The book is a blast and I'd recommend it. Don't purchase it for intellectual stimulation. Purchase it for a fun read that is thought provoking. But, as always, think of the risks involved and what the MIT kids did about them.