Casino ATM Puzzles
July 13, 2009
Tyler Cowen poses a fun question about casino ATMs:
Imagine you walk into a Las Vegas casino with the intention of making a $50 bet on your favorite Major League Baseball team. You check your wallet but find it empty; so you approach the nearest ATM. After swiping your debit card, the service fee notice appears; to withdraw up to a thousand dollars will cost five bucks. Now, you could shop around for a cheaper ATM, but since this is Las Vegas, you guess that all of the ATMs are going to be expensive. So you think, "if I withdraw $100, I will pay a 5% fee for this transaction; but if I withdraw $200, the fee will only come to 2.5%." What do you do?
Well, you're not going to walk away with nothing. You came into the casino to bet on the baseball game. You decide that it would be foolish to withdraw a small amount of money, because the fee will eat away a big percentage of the transaction, so you withdraw more than you originally intended.
This turns out to be ideal for the casino. Not only do they make a windfall on the ATM fee, but now the customer is walking around with more cash in her wallet than she originally intended. It's pretty likely that a gambler lacking strict self-control will give that cash right back to the house.
A truly "rational" gambler would realize that withdrawing more money than she originally intended is a terrible idea. Paying a slightly higher percentage fee isn't a bad thing if it means saving money she would have lost on the casino floor. Plus, that high ATM fee would work as a bigger disincentive to go back and withdraw again once she's reached her pre-determined limit. Fortunately for the casinos, sometimes we just don't act in a rational way.
Should the service fee by high or low? It could cut either way. A low service fee encourages withdrawals and thus gambling, which is profitable for the casino. A high service fee takes in money from the desperate and those with high time preference.I actually disagree with one of Cowen's primary assumptions: that low fees encourage withdrawals. In fact, I would argue that, in this context, high service fees actually encourage withdrawals. Here is why:
Imagine you walk into a Las Vegas casino with the intention of making a $50 bet on your favorite Major League Baseball team. You check your wallet but find it empty; so you approach the nearest ATM. After swiping your debit card, the service fee notice appears; to withdraw up to a thousand dollars will cost five bucks. Now, you could shop around for a cheaper ATM, but since this is Las Vegas, you guess that all of the ATMs are going to be expensive. So you think, "if I withdraw $100, I will pay a 5% fee for this transaction; but if I withdraw $200, the fee will only come to 2.5%." What do you do?
Well, you're not going to walk away with nothing. You came into the casino to bet on the baseball game. You decide that it would be foolish to withdraw a small amount of money, because the fee will eat away a big percentage of the transaction, so you withdraw more than you originally intended.
This turns out to be ideal for the casino. Not only do they make a windfall on the ATM fee, but now the customer is walking around with more cash in her wallet than she originally intended. It's pretty likely that a gambler lacking strict self-control will give that cash right back to the house.
A truly "rational" gambler would realize that withdrawing more money than she originally intended is a terrible idea. Paying a slightly higher percentage fee isn't a bad thing if it means saving money she would have lost on the casino floor. Plus, that high ATM fee would work as a bigger disincentive to go back and withdraw again once she's reached her pre-determined limit. Fortunately for the casinos, sometimes we just don't act in a rational way.
